-----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, NPMw2bPu5IG3JD56txjAUUK0M+s+kYPyhACX00ygHLO7gD6GyqColCxJC8ESZKaX fIKKm6sDUeAgf+tQx4JKiQ== 0000720851-05-000057.txt : 20050622 0000720851-05-000057.hdr.sgml : 20050622 20050622160432 ACCESSION NUMBER: 0000720851-05-000057 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20050622 DATE AS OF CHANGE: 20050622 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: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-126047 FILM NUMBER: 05910278 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 S-2 1 form_s2.txt LAURUS FUNDING 5/16/2005 REG. STATEMENT FORM S-2
As filed with the Securities and Exchange Commission on June 22, 2005 Registration Statement No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------- FORM S-2 ------------------------------------- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------- NESTOR, INC. (Exact name of registrant as specified in its charter) ------------------------------------- Delaware 13-3163744 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 400 Massasoit Avenue, Suite 200 East Providence, Rhode Island 02914-2020 (401) 434-5522 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------------- William B. Danzell Chief Executive Officer Nestor, Inc. 400 Massasoit Avenue, Suite 200 East Providence, Rhode Island 02914-2020 (401) 434-5522 (Name, address, including zip code, and telephone number, including area code,of agent for service) ------------------------------------- Copies to: Benjamin M. Alexander, Esq. Nestor, Inc. 400 Massasoit Avenue, Suite 200 East Providence, Rhode Island 02914-2020 Telephone: (401) 434-5522, ext 738 Telecopy: (401) 434-5809 Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------- -------------- -------------- ------------------ -------------- Maximum Proposed Proposed Amount Offering Maximum Amount of to be Price Aggregate Registration Title of Shares to be Registered Registered(1) Per Share(2) Offering Price(2) Fee(3) - -------------------------------------------------- -------------- -------------- ------------------ -------------- Common Stock, $.01 par value per share........ 1,130,927 $5.55 $6,276,644.85 $738.76 - -------------------------------------------------- -------------- -------------- ------------------ -------------- (1) Pursuant to Rule 416 under the Securities Act of 1933, we are also registering such indeterminate number of shares of common stock as may be issued pursuant to the anti-dilution provisions of our convertible notes issued on November 5 and November 9, 2004. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act and based upon the average of the high and low prices on the OTC Bulletin Board on June 20, 2005. (3) Calculated pursuant to Rule 457(c) based on an estimate of the proposed maximum aggregate offering price. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING STOCKHOLDER NAMED IN THIS PROSPECTUS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING STOCKHOLDER NAMED IN THIS PROSPECTUS IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. Subject to completion, dated June 22, 2005 PROSPECTUS NESTOR, INC. 1,130,927 SHARES OF COMMON STOCK ------------------------------------- This prospectus relates to resale by Laurus Master Fund, Ltd., the selling stockholder, of up to 1,130,927 shares of our common stock consisting of: o 1,030,927 shares of our common stock issuable upon the conversion of the principal amount of an outstanding convertible note that we previously issued to the selling stockholder in a private placement; and o 100,000 shares of our common stock issuable upon the exercise of a warrant that we issued to the selling stockholder in connection with the private placement of that convertible note. Our common stock is traded on the OTC Bulletin Board under the symbol "NESO." The last reported sale price for our common stock on the OTC Bulletin Board on June 21, 2005 was $5.60 per share. You are urged to obtain current market quotations for our common stock. The selling stockholder may offer its shares of common stock from time to time, in the open market, in privately negotiated transactions, in an underwritten offering, or a combination of methods, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The selling stockholder may engage brokers or dealers who may receive commissions or discounts from the selling stockholder. Any broker-dealer acquiring the common stock from the selling stockholder may sell these securities in normal market making activities, through other brokers on a principal or agency basis, in negotiated transactions, to its customers or through a combination of methods. See "Plan of Distribution" beginning on page 21. We will bear all of the expenses and fees incurred in registering the shares offered by this prospectus. ------------------------------------- INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH OUR BUSINESS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is ____________ ___, __________ . TABLE OF CONTENTS Page PROSPECTUS SUMMARY...........................................3 THE OFFERING.................................................3 RISK FACTORS.................................................5 SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION...........13 USE OF PROCEEDS..............................................14 SELLING STOCKHOLDER..........................................14 DESCRIPTION OF THE NOTES.....................................15 DESCRIPTION OF CAPITAL STOCK.................................19 SHARES ELIGIBLE FOR FUTURE SALE..............................20 PLAN OF DISTRIBUTION.........................................21 LEGAL MATTERS................................................22 EXPERTS......................................................23 WHERE YOU CAN FIND MORE INFORMATION..........................23 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............23 Nestor, Inc.'s executive offices are located at 400 Massasoit Avenue, Suite 200, East Providence, Rhode Island 02914-2020, our telephone number is (401) 434-5522 and our Internet address is http://www.nestor.com. The information on our Internet website is not incorporated by reference in this prospectus. Unless the context otherwise requires references in this prospectus to "Nestor," "we," "us," and "our" refer to Nestor, Inc. and its subsidiaries and references to "NTS" refer to our subsidiary Nestor Traffic Systems, Inc. and its subsidiary. Nestor, Nestor Traffic Systems, and CrossingGuard are registered trademarks of ours. This prospectus is accompanied by our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and by our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005. We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this prospectus. The selling stockholder is offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. -2- PROSPECTUS SUMMARY This summary highlights important features of this offering and the information included or incorporated by reference in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under "Risk Factors." Nestor, Inc. Nestor, Inc., through its wholly owned subsidiary, Nestor Traffic Systems, Inc., is a leading provider of innovative, video based traffic safety and enforcement systems to state and local governments throughout the United States. Our principal product, CrossingGuard(R) incorporates our patented image processing technology into an intelligent turnkey solution that predicts and records the occurrence of a red light violation, and manages the entire process of issuing and processing a citation. As of March 31, 2005, we had installed CrossingGuard at 119 approaches for 13 customers throughout the United States, and our contracts called for us to install CrossingGuard at an additional 123 approaches. There can be no assurance that all approaches authorized under existing contracts will ultimately be installed; moreover, we have identified twenty of these approaches which we believe are highly unlikely to be installed despite the authorizing contract. We offer an advanced mobile speed enforcement product, through an agreement with a third party vendor, which provides us with exclusive rights to market their product throughout North America. We also offer fixed speed enforcement solutions. CrossingGuard is an automated, video-based monitoring system that predicts and records the occurrence of a red light violation. If a violation is expected to occur, the system can send a signal to the traffic controller to request a brief extension of the red phase for cross traffic. This helps prevent collisions between violators and vehicles in the cross traffic accelerating on a green signal. The system simultaneously records the violation sequence, including a close-up of the vehicle and license plate, and transmits video evidence electronically to the police department, which reviews the violation and issues a citation. We provide a complete turnkey solution, offering violation review, citation preparation and processing, billing and collection, court scheduling, evidence, and resolution. Our advanced technology captures approximately 270 images of each violation, enabling us to have an enforcement rate in excess of 95%. Depending on the terms of each contract, our revenue ranges from $11 to $99 per citation issued or paid or fixed monthly fees ranging from $2,000 to $12,000 per approach for system delivery and lease, maintenance, software licensing, and processing services. We believe that our image processing technology provides us with a strategic advantage and allows us to offer a comprehensive solution to our state and local government clients. RECENT DEVELOPMENTS On May 27, 2005, we entered into a lease with Admiral Associates. The leased premise is approximately 12,700 square feet of office space and 11,000 square feet of warehouse space. The initial term of the lease commences on the completion of build out of the office space and is for 60 months. The lease may be renewed for two one-year terms at our option. Upon the earlier of provision of sufficient additional parking or the second anniversary of the commencement of the term, Admiral Associates has the right, subject to our right of first refusal, to rent the warehouse space to a third party willing to convert the warehouse space to office space. We have the right to convert the warehouse space to office space at any time during the term. During the initial term, rent for the office space will be $7,408.33 per month. During any renewal terms, rent for the office space will be $7,937.50. If any warehouse space is converted to office space at our request, rent for the office space will increase proportionally to the increase in total office space. If we exercise our right of first refusal with respect to any converted warehouse space, rent for such converted office space will be that offered by the third party triggering our right of first refusal. During the first year of the initial term, the warehouse space will be rent free. Upon the earlier of provision of sufficient additional parking or the second anniversary of the commencement of the term, annual rent for the warehouse space will be $4.00 per square foot. During any renewal terms, annual rent for the warehouse space will be $4.50 per square foot. We will be responsible for 30% of the cost of agreed-upon build out of the initial office space and for 30% of the costs of any agreed-upon conversion of warehouse space at our request. -3- On June 22, 2005, each of James S. Bennett, Robert G. Flanders, Jr., William J. Gilbane, Jr., and Donald R. Sweitzer, each a director of Nestor, Inc. notified us that he refused to stand for re-election to the Board of Directors at the Annual Meeting of Stockholders to be held on June 23, 2005. We believe that each of the directors refusing to stand for re-election did so because of fundamental disagreements with the chief executive officer concerning his management of the company. James S. Bennett is a member of the Audit and New Business and Government Relations Committees of the Board. Robert G. Flanders, Jr. is the Chairman of the Compensation Committee and a member of the New Business and Government Relations Committee. William J. Gilbane, Jr. is a member of the Compensation and New Business and Government Relations Committees of the Board. Donald R. Sweitzer is the Chairman of the New Business and Government Relations Committee and a member of the Compensation Committee. In light of the foregoing refusals to stand for re-election, the annual meeting of stockholders scheduled for June 23, 2005 is expected to be adjourned until July 19, 2005 to allow time for supplementary proxy materials to be circulated to stockholders. CORPORATE INFORMATION Our executive offices are located at 400 Massasoit Avenue, Suite 200, East Providence, Rhode Island 02914-2020, our telephone number is (401) 434-5522 and our Internet address is http://www.nestor.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this prospectus. THE OFFERING Common Stock offered by selling stockholder...... 1,130,927 shares Use of proceeds.................................. Nestor will not receive any proceeds from the sale of shares in this offering. OTC Bulletin Board symbol........................ NESO -4- RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before purchasing our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE We have a history of net losses. For the years ended December 31, 2004, 2003, 2002, 2001 and 2000, our net losses have been approximately $4,473,000, $4,890,000, $12,634,000, $1,565,000 and $2,995,000, respectively. For the three-month period ended March 31, 2005, our net loss was approximately $1,910,000. We expect to incur continuing losses for the foreseeable future due to significant engineering, product delivery, marketing and general and administrative expenses, and those losses could be substantial. We will need to generate significantly higher revenue to achieve profitability, which we may be unable to do. Even if we do achieve profitability, we may not be able to sustain or increase our profitability in the future. ALMOST ALL OF OUR CURRENT REVENUE IS FROM A SINGLE PRODUCT AND RELATED SERVICES Currently, almost all of our revenue is from sales of our CrossingGuard systems, services related to installing and maintaining CrossingGuard systems or processing citations issued by CrossingGuard systems. There can be no assurance that we will be able to develop other sources of revenue. Because our revenues depend on a single product, any decrease in the market share held by CrossingGuard would have a substantial adverse effect on our business and financial results. If we fail to meet our expectations for the growth in sales of CrossingGuard or if we are not able to develop other sources of revenue, we will not be able to generate the significantly higher revenue that we believe we must generate to achieve profitability. OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO SECURE AND MAINTAIN FUTURE CONTRACTS WITH GOVERNMENT AGENCIES Contracts with government agencies account for substantially all of our revenues. The majority of these contracts may be terminated at any time on short notice with limited penalties. Accordingly, we might fail to derive any revenue from sales to government agencies in any given future period. If government agencies fail to renew or if they terminate any of these contracts, it would adversely affect our business and results of operations. In addition, many of our contracts do not allow installations until sites have been approved by the contracting agency; in those cases, if a government agency fails to approve sites, we will not be able to deliver products and services, and thereby, generate revenue associated therewith. WE FACE SUBSTANTIAL COMPETITION, WHICH MAY RESULT IN OTHERS DEVELOPING PRODUCTS AND SERVICES MORE SUCCESSFULLY THAN WE DO Many other companies offer products that directly compete with CrossingGuard and our other products. Many of our current and potential competitors have significantly greater financial, marketing, technical and other competitive resources than we do and may be able bring new technologies to market before we are able to do so. Some of our competitors may have a competitive advantage because of their size, market share, legacy customer relationships, enhanced driver imaging, additional products offered and/or citation-processing experience. Current and potential competitors may establish cooperative relationships with one another or with third parties to compete more effectively against us. One of our competitors, ACS, offers state and local governments solutions to a wide variety of data processing issues and may have a competitive advantage because of the scope of its relationship with, and the -5- volume of transactions it conducts for, a particular government. It is also possible that new competitors may emerge and acquire market share. If we are not successful in protecting our patents, we would lose a competitive advantage. See " If We Fail To Protect And Preserve Our Intellectual Property, We May Lose An Important Competitive Advantage." THE FAILURE OF GOVERNMENTS TO AUTHORIZE AUTOMATED TRAFFIC SAFETY ENFORCEMENT MAY HINDER OUR GROWTH AND HARM OUR BUSINESS Approximately fifteen states and the District of Columbia authorize some use of automated red light enforcement or allow municipalities to elect to do so under home rule laws. It is uncertain at this time which additional states, if any, will authorize the use of automated red light enforcement or if there will be other changes in the states that currently allow the practice. If additional states do not authorize the use of automated red light enforcement, our opportunities to generate additional revenue from the sale of CrossingGuard systems and related services will be limited. Recently, the Virginia General Assembly declined to extend authorization for automated red light enforcement beyond the sunset date of June 30, 2005 in the enabling legislation. We could be subject to differing and inconsistent laws and regulations with respect to CrossingGuard. If that were to happen, we may find it necessary to eliminate, modify or cancel components of our services that could result in additional development costs and the possible loss of revenue. We cannot predict whether future legislative changes or other changes in the fifteen states or other states, in the administration of traffic enforcement programs, will have an adverse effect on our business. The market for automated speed enforcement products in the United States is very limited. Approximately five states and the District of Columbia have legislation authorizing some use of automated speed enforcement or allow municipalities to elect to do so under home rule laws. Some of these states authorize automated speed enforcement only in limited circumstances such as school or work zones. If additional states do not authorize automated speed enforcement, our opportunities to generate additional revenue from the sale of automated speed enforcement systems and related services will be limited. OUR FINANCIAL RESULTS WILL DEPEND SIGNIFICANTLY ON OUR ABILITY TO CONTINUALLY DEVELOP OUR PRODUCTS AND TECHNOLOGIES The markets for which our products and technologies are designed are intensely competitive and are characterized by short product lifecycles, rapidly changing technology and evolving industry standards. As a result, our financial performance will depend to a significant extent on our ability to successfully develop and enhance our products. Because of the rapidly changing technologies in the businesses in which we operate, we believe that significant expenditures for research and development and engineering will continue to be required in the future. To succeed in these businesses, we must anticipate the features and functionality that customers will demand. We must then incorporate those features and functionality into products that meet the design requirements of our customers. The success of our product introductions will depend on several factors, including: o proper product definition; o timely completion and introduction of enhanced product designs; o the ability of subcontractors and component manufacturers to effectively design and implement the manufacture of new or enhanced products and technologies; o the quality of our products and technologies; o product and technology performance as compared to competitors' products and technologies; o market acceptance of our products; and o competitive pricing of products, services and technologies. -6- We must successfully identify product and service opportunities and develop and bring our products and technologies to market in a timely manner. We have in the past experienced delays in completing the development or the introduction of new products. Our failure to successfully develop and introduce new or enhanced products and technologies or to achieve market acceptance for such products and technologies may materially harm our business and financial performance. OUR INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW AND OTHERWISE NEGATIVELY AFFECT OUR OPERATIONS. At March 31, 2005, we had approximately $5.4 million of outstanding convertible debt. We incurred an additional $6 million of convertible debt on May 16, 2005, which is secured by the proceeds of most of our current contracts. We intend to satisfy our current and future debt service obligations from cash generated by our operations, our existing cash and investments and, in the case of principal payments at maturity, funds from external sources. We may not have sufficient funds and we may be unable to arrange for additional financing to satisfy our principal or interest payment obligations when those obligations come due. Funds from external sources may not be available on acceptable terms, or at all. Our indebtedness could have significant additional negative consequences, including: o increasing our vulnerability to general adverse economic and industry conditions; o limiting our ability to obtain additional financing; o requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including sustaining our operations, capital expenditures and research and development; o limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and o placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources. WE MAY NEED ADDITIONAL FINANCING, WHICH MAY BE DIFFICULT TO OBTAIN AND MAY RESTRICT OUR OPERATIONS AND DILUTE YOUR OWNERSHIP INTEREST We may need to raise additional funds in the future to fund our operations, deliver our products, to expand or enhance our products and services, to repay the principal amount due on our outstanding 5% Senior Convertible Notes due October 31, 2007 or to respond to competitive pressures or perceived opportunities. We cannot make any assurance that additional financing will be available on acceptable terms, or at all. If adequate funds are not available or not available on acceptable terms, our business and financial results may suffer. The covenants in our outstanding 5% Senior Convertible Notes limit our ability to raise additional debt. If we raise additional funds by issuing equity securities, further dilution to our then existing stockholders will result and the terms of the financing may adversely affect the holdings or the rights of such stockholders. In addition, the terms and conditions of debt financing may result in restrictions on our operations or require that we grant a security interest in some or all of the assets for which such debt financing would be used. We could be required to seek funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products which we would otherwise pursue on our own. FLUCTUATIONS IN OUR RESULTS OF OPERATIONS MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future. Most of our expenses are fixed in the short-term, and we may not be able to reduce spending quickly if our revenue is -7- lower than expected. In addition, our ability to forecast revenue is limited. As a result, our operating results are volatile and difficult to predict and you should not rely on the results of one quarter as an indication of future performance. Factors that may cause our operating results to fluctuate include the risks discussed in this section as well as: o costs related to customization of our products and services; o the planned expansion of our operations, including opening new offices, hiring new personnel, and the amount and timing of expenditures related to this expansion; o announcements or introductions of new products and services by our competitors; o the failure of additional states to adopt legislation enabling the use of automated traffic safety enforcement systems; o software defects and other product quality problems; o the discretionary nature of our clients' purchasing and budgetary cycles; o the varying size, timing and contractual terms of orders for our products and services; and o the mix of revenue from our products and services. OUR SALES CYCLES VARY SIGNIFICANTLY WHICH MAKES IT DIFFICULT TO PLAN OUR EXPENSES AND FORECAST OUR RESULTS Our sales cycles typically range from six to eighteen months or more. It is therefore difficult to predict the quarter in which a particular sale will occur and to plan our expenses accordingly. The period between our initial contact with potential clients and the installation of our products, the use of our services and our receipt of revenue, if any, varies due to several factors, including: o the complex nature of our products and services; o the failure of the jurisdiction to adopt legislation enabling the use of automated traffic safety enforcement systems or political or legal challenges to existing legislation; o the novelty of automated enforcement in many jurisdictions and a lack of familiarity with automated enforcement systems on the part of legislative, executive and judicial bodies and the public; o our clients' purchasing and budget cycles; o the selection, award and contracting processes at municipalities and other government entities, including protests by other bidders with respect to competitive awards; o our clients' internal evaluation, approval and order processes; o the site evaluation and analysis process; and o our clients' delays in issuing requests for proposals or in awarding contracts because of announcements or planned introductions of new products or services by our competitors. Any delay or failure to complete sales in a particular quarter could reduce our revenue in that quarter, as well as subsequent quarters over which revenue or the license would likely be recognized. If our sales cycles unexpectedly lengthen in general or for one or more large clients, it would -8- delay our receipt of the related revenue. If we were to experience a delay of several weeks or longer on a large client, it could harm our ability to meet our forecasts for a given quarter. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, OUR OPERATIONS WOULD BE DISRUPTED AND OUR BUSINESS WOULD BE HARMED We believe that the hiring and retaining of qualified individuals at all levels in our organization will be essential to our ability to sustain and manage growth successfully. Competition for highly qualified technical personnel is intense and we may not be successful in attracting and retaining the necessary personnel, which may limit the rate at which we can develop products and generate sales. We will be particularly dependent on the efforts and abilities of our senior management personnel. The departure of any of our senior management members or other key personnel could harm our business. OUR PRODUCTS MIGHT NOT ACHIEVE MARKET ACCEPTANCE The market for our products is still emerging. The rate at which state and local government bodies have adopted CrossingGuard has varied significantly by market, and we expect to continue to experience variations in the degree to which CrossingGuard is accepted. To date, no state or local government bodies in our market area have adopted our speed enforcement products. Our ability to grow will depend on the extent to which our potential customers accept our products. This acceptance may be limited by: o the failure of prospective customers to conclude that our products are valuable and should be acquired and used; o the failure of additional states to adopt legislation enabling the use of automated traffic safety enforcement systems; o the novelty of automated enforcement in many jurisdictions and a lack of familiarity with automated enforcement systems on the part of legislative, executive and judicial bodies and the public; o the reluctance of our prospective customers to replace their existing solutions with our products; o marketing efforts of our competitors; and o the emergence of new technologies that could cause our products to be less competitive or obsolete. Because automated traffic enforcement in the United States is still in an early stage of development, we cannot accurately predict how large the market will become, and we have limited insight into trends that may emerge and affect our business. For example, without knowing how commonplace automated enforcement will become, we may have difficulties in predicting the competitive environment that will develop. OUR INTELLECTUAL PROPERTY MIGHT NOT BE PROTECTIBLE We rely on a combination of copyright, trademark, patent, and trade-secret laws, employee and third-party nondisclosure agreements, and other arrangements to protect our proprietary rights. Despite these precautions, it may be possible for unauthorized third parties to copy our products or obtain and use information that we regard as proprietary to create products that compete against ours. In addition, some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to the same extent as do the laws of the United States. Were we to conduct international activities, our exposure to unauthorized copying and use of our products and proprietary information would increase. The scope of United States patent protection in the software industry is not well defined and will evolve as the United States Patent and Trademark Office grants additional patents. Because some patent applications in the United States are not publicly disclosed until the patent is issued or 18 months after the filing date, applications may exist that would relate to our products and that are not publicly accessible. -9- Moreover, a patent search has not been performed in an attempt to identify patents applicable to our business and, even if such a search were conducted, all patents applicable to the business might not be located. IF WE FAIL TO PROTECT AND PRESERVE OUR INTELLECTUAL PROPERTY, WE MAY LOSE AN IMPORTANT COMPETITIVE ADVANTAGE On November 6, 2003, we filed a complaint in the United States District Court for Rhode Island against Redflex Traffic Systems Inc., alleging that Redflex's automated red light enforcement systems infringe our US Patent No. 6,188,329. On November 25, 2003, we filed a complaint in the United States District Court for the District of Central California against Transol USA, Inc., alleging that Transol's automated red light enforcement systems infringe that patent. We subsequently filed additional claims alleging that Transol and Redflex have also infringed our US Patent No. 6,754,663. We have dropped our claims against Redflex. Transol has filed counterclaims alleging that our patents are invalid. In a summary judgment granted on April 29, 2005, Transol was found to not infringe our patents. Transol has informed us that it will seek summary judgment on its counterclaims that our patents are invalid. We cannot give assurance that we will succeed in defending our patents. Were one or more of our patents invalidated, our competitors will be able to offer the technology that those patents describe and we would lose the competitive advantage of being the exclusive source of products using that technology. WE ARE AT RISK OF CLAIMS THAT OUR PRODUCTS OR SERVICES INFRINGE THE PROPRIETARY RIGHTS OF OTHERS Given our ongoing efforts to develop and market new technologies and products, we may from time to time be served with claims from third parties asserting that our products or technologies infringe their intellectual property rights. If, as a result of any claims, we were precluded from using technologies or intellectual property rights, licenses to the disputed third-party technology or intellectual property rights might not be available on reasonable commercial terms, or at all. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation, either as plaintiff or defendant, could result in significant expense and divert the efforts of our technical and management personnel from productive tasks, whether or not litigation is resolved in our favor. An adverse ruling in any litigation might require us to pay substantial damages, to discontinue our use and sale of infringing products and to expend significant resources in order to develop non-infringing technology or obtain licenses for our infringing technology. A court might also invalidate our patents, trademarks or other proprietary rights. A successful claim against us, coupled with our failure to develop or license a substitute technology, could cause our business, financial condition and results of operations to be materially adversely affected. As the number of software products increase and the functionality of these products further overlaps, we believe that our risk of infringement claims will increase. IF WE ARE UNABLE TO SAFEGUARD THE INTEGRITY, SECURITY AND PRIVACY OF OUR DATA OR OUR CLIENTS' DATA, OUR REVENUE MAY DECLINE, OUR BUSINESS COULD BE DISRUPTED AND WE MAY BE SUED We need to preserve and protect our data and our clients' data against loss, corruption and misappropriation caused by system failures and unauthorized access. We could be subject to liability claims by individuals whose data resides in our databases for misuse of personal information, including unauthorized marketing purposes. These claims could result in costly litigation. Periodically, we have experienced minor systems errors and interruptions, including Internet disruptions, which we believe may occur periodically in the future. A party who is able to circumvent our security measures could misappropriate or destroy proprietary information or cause interruptions in our operations. We may be required to make significant expenditures to protect against systems failures or security breaches or to alleviate problems caused by any failures or breaches. Any failure that causes the loss or corruption of, or unauthorized access to, this data could reduce client satisfaction, expose us to liability and, if significant, could cause our revenue to decline and our expenses to increase. -10- WE MAY MAKE ACQUISITIONS, WHICH COULD DIVERT MANAGEMENT'S ATTENTION, CAUSE OWNERSHIP DILUTION TO OUR STOCKHOLDERS AND BE DIFFICULT TO INTEGRATE We have expanded and may seek to continue to expand our operations through the acquisition of additional businesses that complement our core skills and have the potential to increase our overall value. Our future growth may depend, in part, upon the continued success of our acquisitions. Acquisitions involve many risks, which could have a material adverse effect on our business, financial condition and results of operations, including: o acquired businesses may not achieve anticipated revenues, earnings or cash flow; o integration of acquired businesses and technologies may not be successful and we may not realize anticipated economic, operational and other benefits in a timely manner, particularly if we acquire a business in a market in which we have limited or no current expertise or with a corporate culture different from ours; o potential dilutive effect on our stockholders from continued issuance of common stock as consideration for acquisitions; o adverse effect on net income of impairment charges related to goodwill and other intangible assets and other acquisition-related charges, costs and expenses effects on net income; o competing with other companies, many of which have greater financial and other resources to acquire attractive companies, making it more difficult to acquire suitable companies on acceptable terms; and o disruption of our existing business, distraction of management and other resources and difficulty in maintaining our current business standards, controls and procedures. THE FAILURE OF OUR SUPPLIERS TO DELIVER COMPONENTS, EQUIPMENT AND MATERIALS IN SUFFICIENT QUANTITIES AND IN A TIMELY MANNER COULD ADVERSELY AFFECT OUR BUSINESS Our business employs a wide variety of components, equipment and materials from a limited number of suppliers. To date, we have found that the components, equipment and materials necessary for the development, testing, production and delivery of our products and services have sometimes not been available in the quantities or at the times we have required. Our failure to procure components, equipment and materials in particular quantities or at a particular time may result in delays in meeting our customer's needs, which could have a negative effect on customer satisfaction and on our revenues and results of operations. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY AND TIME-CONSUMING LITIGATION Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions. Any product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly, and potential liabilities could exceed our available insurance coverage. RISKS RELATED TO OUR COMMON STOCK - --------------------------------- OUR COMMON STOCK PRICE IS VOLATILE AND MAY DECLINE IN THE FUTURE The market price of our common stock has fluctuated significantly and may be affected by our operating results, changes in our business, changes in the industries in which we conduct business, and general market and economic conditions which are beyond our control. In addition, the stock markets in general have recently experienced extreme price and volume fluctuations. These fluctuations have affected stock prices of many companies without regard to their specific operating performance. These market fluctuations may make it difficult for stockholders to sell their shares at a price equal to or above the price at which the shares were purchased. In addition, if our results of operations are below the expectations of market analysts and investors, the market price of our common stock could be adversely affected. -11- OUR BOARD OF DIRECTORS CAN, WITHOUT STOCKHOLDER APPROVAL, CAUSE PREFERRED STOCK TO BE ISSUED ON TERMS THAT ADVERSELY AFFECT COMMON STOCKHOLDERS Under our certificate of incorporation, our board of directors is authorized to issue up to 10,000,000 shares of preferred stock, of which 180,000 shares are issued and outstanding, and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. If the board causes any additional preferred stock to be issued, the rights of the holders of our common stock would be adversely affected. The board's ability to determine the terms of preferred stock and to cause its issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no current plans to issue additional shares of preferred stock. OUR CHIEF EXECUTIVE OFFICER EXERCISES SIGNIFICANT CONTROL OVER OUR BUSINESS AND AFFAIRS, INCLUDING THE APPROVAL OF CHANGE IN CONTROL TRANSACTIONS Our Chief Executive Officer beneficially owns approximately 54% of our common stock. He will be able to exert substantial influence over all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, or impeding a merger, consolidation, takeover or business combination even if the transaction might be beneficial to our stockholders. In addition, Section 203 of the Delaware General Corporation Law restricts business combinations with any "interested stockholder" as defined by the statute. The statute may have the effect of delaying, deferring or preventing a change in control of our company. WE HAVE NOT PAID, AND DO NOT INTEND TO PAY, DIVIDENDS AND THEREFORE, UNLESS OUR COMMON STOCK APPRECIATES IN VALUE, OUR INVESTORS MAY NOT BENEFIT FROM HOLDING OUR COMMON STOCK We have not paid any cash dividends since inception. We do not anticipate paying any cash dividends in the foreseeable future. As a result, our investors will not be able to benefit from owning our common stock unless the market price of our common stock becomes greater than the basis that these investors have in their shares. THE PRICE OF OUR COMMON STOCK MAY DECLINE BECAUSE A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK IS AVAILABLE FOR TRADING IN THE PUBLIC Availability of shares of our common stock could depress the price of our common stock. A substantial amount of common stock is available for trading in the public market. The stock in the market may cause the price of our common stock to decline. In addition, if our stockholders sell substantial numbers of stock of our common stock in the public markets, the market price of our common stock could fall. These sales might also make it more difficult for us to sell equity or equity related securities at a time and price that we would deem appropriate. We also have issued options, warrants and convertible securities which can be exercised for, or converted to, shares of common stock, many of which would be freely tradable without restrictions or further registration under the Securities Act of 1933. See "Description of Common Stock" and "Shares Eligible for Future Sale." There were approximately 18,812,154 shares of our common stock outstanding as of June 21, 2005, of which 9,093,258 were freely tradable without restrictions or further registration under the Securities Act of 1933. As of June 21, 2005, we have issued and outstanding warrants and options to purchase up to 3,158.311 shares of our common stock, preferred stock convertible into 18,000 shares of our common stock and debt convertible into 1,924,398 including 1,130,927 of the shares of our common stock offered by this prospectus. The exercise of such warrants and options and conversion of convertible securities may dilute the interests of all stockholders. Possible future resale of such warrants and options or conversion of such convertible securities could adversely affect the prevailing market price of our common stock. -12- OUR COMMON STOCK TRADES ON THE OTC BULLETIN BOARD AND MAY BE SUBJECT TO THE SEC'S "PENNY STOCK" RULES Our stockholders may find it difficult to buy, sell and obtain pricing information about, as well as news coverage of, our common stock because it is traded on the OTC Bulletin Board. Being traded on the OTC Bulletin Board, rather than on a national securities exchange, may lessen investors' interest in our securities generally and materially adversely affect the trading market and prices for those securities and our ability to issue additional securities or to secure additional financing. The price of our common stock could make it more difficult for stockholders to sell their shares. Our common stock will be subject to the penny stock rules under the Securities Exchange Act of 1934 if its price is less than $5.00 per share. The last reported sale price on June 21, 2005 was $5.60, but our common stock traded below $5.00 per share throughout 2002, 2003 and until mid-October 2004. The penny stock rules impose additional sales practice requirements on broker-dealers who sell penny stock securities to people who are not established customers or accredited investors. For example, the broker must make a special suitability determination for the buyer and the buyer must be given written consent before the sale. The rules also require that the broker-dealer: o send buyers an SEC-prepared disclosure schedule before completing the sale, disclose the broker's commissions and current quotations for the security; o disclose whether the broker-dealer is the sole market maker for the penny stock and, if so, the broker's control over the market; and o send monthly statements disclosing recent price information held in the customer's account and information on the limited market in penny stocks. These additional burdens may discourage broker-dealers from effecting transactions in our common stock. Thus, if our common stock were to fall within the definition of a penny stock, our liquidity could be reduced, and there could be an adverse effect on the trading market in its common stock. SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION This prospectus includes and incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this prospectus regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included or incorporated in this prospectus, particularly under the heading "Risk Factors," that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements. -13- USE OF PROCEEDS We will not receive any proceeds from the sale of the shares offered pursuant to this prospectus. The selling stockholder will receive all of the proceeds from the sale of the shares of common stock offered by this prospectus. The selling stockholder will pay any expenses incurred by the selling stockholder for brokerage, accounting, tax or legal services or any other expenses incurred by the selling stockholder in disposing of the shares. We will bear all other costs, fees and expenses incurred in effecting the registration of the shares covered by this prospectus, including, without limitation, all registration and filing fees and fees and expenses of our counsel and our accountants. SELLING STOCKHOLDER The shares of common stock covered by this prospectus are (i) 1,030,927 shares of our common stock issuable upon the conversion of the principal amount of an outstanding convertible note that we previously issued to the selling stockholder in a private placement on May 16, 2005 and (ii) 100,000 shares of our common stock issuable upon the exercise of a warrant that we issued to the selling stockholder in connection with the private placement of that convertible note. We do not know when or in what amounts the selling stockholder may offer shares for sale. The selling stockholder may not sell any or all of the shares offered by this prospectus. Because the selling stockholder may offer all or some of the shares pursuant to this offering, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares, except for limitations on daily volume of sales by the selling stockholder described in "Plan of Distribution," we cannot estimate the number of shares that will be held by the selling stockholder after completion of the offering. For purposes of this table, however, we have assumed that, after completion of the offering, none of the shares covered by this prospectus will be held by the selling stockholder. Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with respect to shares. Shares of common stock issuable upon the conversion of the convertible note or upon the exercise of the warrant are deemed outstanding for computing the percentage ownership of the person holding the convertible note and the warrant but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, the person named in the table has sole voting and investment power with respect to its shares of common stock. The inclusion of any shares in this table does not constitute an admission of beneficial ownership for the persons named below.
Shares of Common Stock Number of Shares Shares of Common Stock to be Beneficially Owned Prior to of Common Stock Beneficially Owned After Name of Selling Stockholder(1) Offering (1)(2) Being Offered (3) Offering (4) - ----------------------------- --------------------------- ---------------- ---------------------------- Number Percentage Number Percentage - ----------------------------- -------------- ----------- ---------------- --------------- ----------- Laurus Master Fund, Ltd.(5) 988,029 4.99% 1,130,927 0 0 (1) The term "selling stockholder" includes donees, pledgees, transferees or other successors-in-interest selling shares received after the date of this prospectus from the selling stockholder as a gift, pledge, partnership distribution or other non-sale related transfer. (2) Comprises shares of common stock issuable upon conversion of the principal amount of a convertible note, and shares of common stock issuable upon exercise of a warrant. The selling stockholder has contractually agreed with us to restrict the ability to convert notes or exercise warrants such that the number of shares of our common stock held by it does not exceed 4.99% of our outstanding shares of common stock. This restriction does not apply if we default on the convertible note. If both parties agree to waive this restriction, the number of shares of our common stock beneficially owned by the selling stockholder before this offering would be 1,130,927, which equals 5.67% of our outstanding shares of common stock before this offering. (3) We have agreed with the selling stockholder that we will register all of the shares of common stock issuable upon conversion of the principal amount of the convertible note and upon exercise of the warrant without regard to the limitation on conversion and exercise described in the preceding note. (4) We cannot estimate the number of shares that will be held by the selling stockholder after completion of the offering. For purposes of this table, however, we have assumed that, after completion of the offering, none of the shares covered by this prospectus and none of the other shares held by the selling stockholder will be held by the selling stockholder. -14- (5) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, Laurus Capital Management, L.L.C. may be deemed a control person of the shares owned by such entity. David Grin and Eugene Grin are the members of Laurus Capital Management, L.L.C., and as such, share voting and investment control over securities owned by the selling stockholder.
The selling stockholder has not held any position or office with, or has otherwise had a material relationship with, us or any of our subsidiaries within the past three years, other than the private placement in which the convertible note was acquired and two earlier private placements in each of which the selling stockholder acquired another convertible note from us and in one of which the selling stockholder acquired a warrant to purchase 140,000 shares of our common stock. There is no outstanding balance on those earlier convertible notes and the warrant has been exercised. The selling stockholder sold all the shares received upon the conversion of those earlier convertible note and the exercise of that warrant pursuant to offerings registered with the Securities and Exchange Commission, which offerings have been completed. DESCRIPTION OF THE NOTE GENERAL On May 16, 2005, we issued a secured convertible term note to Laurus Master Fund, Ltd., the selling stockholder, in the principal amount of $6,000,000 pursuant to a securities purchase agreement between us and Laurus. The note was amended on June 3, 2005. As of June15, 2005, the outstanding principal balance on the note was $6,000,000 and $25,000 of interest was accrued. The note bears interest at the prime rate plus 4% per year, subject to a floor of 6.00% per year. If our the closing price of our common stock exceeds $5.82 for a period of at least 5 consecutive trading days in a given calendar month, the interest rate for that month will be the prime rate plus 2% per year. If we have registered the shares of our common stock underlying the note and the warrant on a registration statement declared effective by the Securities and Exchange Commission, and the market price of our common stock for the 5 trading days immediately before the last calendar day of a month exceeds the then applicable conversion price by at least 25%, the interest rate for the succeeding calendar month shall be reduced by 2% for each incremental 25% increase in the market price of our common stock above the then applicable conversion price. For calculating the rate of interest on the note, "prime rate" means the interest rate published in the Wall Street Journal as the "prime rate." The note matures on May 16, 2008. We granted to Laurus a first priority security interest in sixteen of our municipal contracts and any contract arising from four awards that have been made tto us with respect to which we are negotiating contracts to secure our obligations under the note pursuant to the securities purchase agreement and a security agreement dated May 16, 2005 between us and Laurus. REPAYMENT Principal on the note is to be repaid in 33 payments of $181,818 on the first of each month from September 1, 2005 until May 1, 2008 and a final payment of $6 on May 16, 2008. We have the option of prepaying the note in full before the maturity of the note by paying to Laurus a sum of money equal to 115% of the outstanding principal amount of the note plus all accrued and unpaid interest on the note. CONVERSION The note is convertible into shares of our common stock at a fixed conversion price of $5.82 per share. With each principal payment listed in the table above, all accrued but unpaid interest is to be paid. Those principal and interest payments are payable at our option in cash or shares of our common stock, subject to price and volume requirements. We cannot choose to make scheduled payments with shares of our common stock until the registration statement of which this prospectus is a part is declared effective by the Securities and Exchange Commission. Also, we cannot choose to make scheduled -15- payments with shares of our common stock while an event of default exists. If we make a scheduled payment in cash, in addition to the scheduled principal amount and accrued but unpaid interest, we must pay an additional amount equal to 3% of the scheduled principal amount. In the event that the closing price of our common stock is greater then 120% of the fixed conversion price for a period of at least ten consecutive trading days, we may, at our sole option, require the conversion at the fixed conversion price of all or a portion of the outstanding principal amount of the note, together with accrued interest on the amount being prepaid, as of the date we provide written notice of the call. The call date shall be at least twenty trading days following the date of the call notice provided that a registration statement covering the shares of common stock issuable upon conversion of the note is effective. Our right to issue a call notice is subject to the limitation that the number of shares of common stock issued in connection with any call notice shall not exceed 25% of the aggregate dollar trading volume of our common stock for the eleven trading days immediately preceding the call date. If the price of our common stock falls below 120% of the fixed conversion price during the twenty trading day period immediately preceding the call date, then Laurus will be required to convert only such amount of the note as shall equal 25% of the aggregate dollar trading volume for each day that our common stock has exceeded 120% of the fixed conversion price. Laurus has the right to choose to convert all or a portion of the principal amount of the note to our common stock at any time, so long as the last reported closing price for our common stock was greater than the fixed conversion price and the registration statement of which this prospectus is a part has been declared effective by the Secutities and Exchange Commission. If the shares of our common stock are subdivided or combined into a greater or smaller number of shares of common stock, or if a dividend is paid on our common stock in shares of common stock, the fixed conversion price will be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each case by the ratio of the total number of shares of our common stock outstanding immediately after the event to the total number of shares of our common stock outstanding immediately before the event. Except for employee stock options and existing obligations to issue stock, if we issues shares of our common stock for less than the then-applicable conversion price, we are obligated to readjust the conversion price on a weighted average basis. Laurus is not permitted under the note to convert an amount that would result in Laurus beneficially holding more than 4.99% of our outstanding common stock except after notice to us upon the occurrence and during the continuance of an event of default, or upon 75 days prior notice to the us, except that at no time shall common stock beneficially owned by Laurus exceed 19.99% of our outstanding common stock. If any shares of common stock are issuable by us under the note at a price below $5.40 per share, the number of shares of common stock issuable by us under the note shall not exceed an aggregate of 3,743,618 shares of common stock (subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations ) unless that issuance of in excess of 3,743,618 shares is approved by the our shareholders. If at any point in time, the number of shares of common stock issued under the note, together with the number of shares of common stock that would then be issuable by us in the event of a conversion or exercise pursuant to the terms of the note, would exceed 3,743,618 shares except for this limitation, we will call a shareholders meeting to solicit shareholder approval. COVENANTS Pursuant to the securities purchase agreement, until we have paid all of our obligations under the note, we have continuing covenants to Laurus, including that: o We will advise Laurus, promptly after we receive any notices of issuance by the Securities and Exchange Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any of our securities, or of the suspension of the qualification of our common stock for offering or sale in any jurisdiction, or the initiation of any proceeding for any that purpose. -16- o We will maintain the quotation or listing of our common stock on the OTC Bulletin Board or on the Pink Sheets, NASDAQ SmallCap Market, NASDAQ National Market, American Stock Exchange or New York Stock Exchange and comply with our reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers and the markets on which our common stock is listed or quoted. o We will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and we will not terminate our status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. o We will obtain the consent of those account-debtors of ours whose accounts receivable we have pledged as security to Laurus to those assignments. o We will use the proceeds of the sale of the note to finance the construction, installation and maintenance of the traffic surveillance systems under the contracts the proceeds of which we have pledged as security to Laurus. o We will permit any representatives designated by Laurus or its succesors, upon reasonable notice and during normal business hours, at such person's expense and accompanied by a our representative, to (a) visit and inspect any of our properties, (b) examine our corporate and financial records of the Company (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom and (c) discuss the affairs, finances and accounts of any such corporations with our directors, officers and independent accountant, except that we will not provide any material, non-public information to Laurus unless Laurus signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws. o We will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon our income, profits, property or business; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof is being contested in good faith by appropriate proceedings and if we have set aside on its books adequate reserves with respect thereto, and provided, further, that we will pay all such taxes, assessments, charges or levies upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. o We will keep our assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as we are; and we will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar business similarly situated as we are and to the extent available on commercially reasonable terms. o We shall maintain in full force and effect our corporate existence, rights and franchises and all licenses and other rights to use intellectual property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. o We will keep our properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time, we will make all needed and proper repairs, renewals, replacements, additions and improvements thereto; and we will at all times comply with each provision of all leases to which we are a party or under which we occupy property if the breach of such provision could reasonably be expected to have a material adverse effect. -17- o We will submit the text of any public announcement using the Laurus's name to Laurus before its dissemination, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. o For so long as 50% of the principal amount of the note is outstanding, we, without the prior written consent of Laurus, will not: o directly or indirectly declare or pay any dividends; o liquidate, dissolve or effect a material reorganization; o become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict our right to perform the provisions of the securities purchase agreement or any of the agreements contemplated thereby; or o materially alter or change the scope of our business. EVENTS OF DEFAULT The following are events of default under the note: o If we do not pay any installment of principal, interest or other fees on the note or on any other promissory note issued under the securities purchase agreement and the note, when due and our failure to pay continues for 14 business days after the due date. o If we breach any material covenant or other term or condition of the note or the securities purchase agreement in any material respect and the breach, if curable, continues for 20 days after Laurus gives us written notice except for breaches of our covenant to assign security interests in specified accounts receivables and receive consents to those assignments from the account-debtors, with respect to which there is no grace period; o If any material representation or warranty that we made in the note, the securities purchase agreement, or in any agreement, statement or certificate that we gave Laurus in writing pursuant to the note or in connection with the note is false or misleading and is not cured for 20 business days after Laurus gives us written notice; o If we (i) apply for, consent to, or suffer to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or other fiduciary of itself or of all or a substantial part of our property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (iv) are adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within 90 days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing; o If any money judgment, writ or similar final process shall be entered or filed against us or any of our property or other assets for more than $500,000, and that judgment, writ or process remain unvacated, unbonded or unstayed for 90 days; o If an SEC issues a stop order on our common stock for 5 consecutive days or 5 days during a period of 10 consecutive days, or -18- o If we do not timely deliver shares of our common stock to Laurus pursuant to and in the form required by the note and the securities purchase agreement, or if required a replacement note when due and our failure to do so continues for 7 business days after the due date. If there is an event of default under the note, our right to elect to make the scheduled payments by delivery of our common stock, our right to require the conversion of all or part of the outstanding principal balance and accrued but unpaid interest to our common stock and our right to prepay the note are suspended until the event of default has been cured or waived by Laurus. After an event of default and the expiration of any grace period, Laurus may elect to require us to pay all amounts due under the note within 5 days. If Laurus elects to require us to pay all amounts due under the note within 5 days, the amount due under the note will be 130% of the outstanding principal amount of the note plus accrued and unpaid interest and fees, if any until the event of default is cured or waived by Laurus. If after that 5 day period we have not repaid in full the amount then due under the note, the conversion price under the note will be reduced to the lower of (i) the conversion price; or (ii) 70% of the average of the three lowest closing prices for our common stock for the 30 trading days before but not including the date of a conversion until the event of default is cured or waived in writing by Laurus. DESCRIPTION OF CAPITAL STOCK GENERAL As of June 21, 2005, Nestor, Inc. had 40,000,000 shares of authorized capital stock. Those shares consisted of: o 30,000,000 shares of common stock, of which 18,812,154 shares were issued and outstanding; and o 10,000,000 shares of preferred stock, of which 3,000,000 shares were designated Series B Convertible Preferred Stock, of which 180,000 shares were issued and outstanding. DESCRIPTION OF NESTOR COMMON STOCK DIVIDENDS. The owners of Nestor common stock may receive dividends when declared by the board of directors out of funds legally available for the payment of dividends. Nestor has no present intention of declaring and paying cash dividends on the common stock at any time in the foreseeable future. VOTING RIGHTS. Each share of common stock is entitled to one vote in the election of directors and all other matters submitted to stockholder vote. There are no cumulative voting rights. LIQUIDATION RIGHTS. If Nestor liquidates, dissolves or winds-up its business, whether voluntarily or not, Nestor's common stockholders will share equally in the distribution of all assets remaining after payment to creditors and preferred stockholders. PREEMPTIVE RIGHTS. The common stock has no preemptive or similar rights. LISTING. Nestor's common stock is traded on the Nasdaq OTC Bulletin Board under the symbol "NESO." DESCRIPTION OF SERIES B CONVERTIBLE PREFERRED STOCK CONVERSION. Each share of Series B Convertible Stock is convertible, at the option of the holder, into one-tenth of a fully paid and non-assessable share of Nestor common stock. -19- RANK. The Series B Convertible Preferred Stock ranks, as to dividend rights, on a parity with the Nestor common stock, on an as-converted basis. Each share of Series B Convertible Preferred Stock ranks, as to rights on liquidation, winding-up or dissolution, senior to Nestor common stock. LIQUIDATION PREFERENCE. Each share of Series B Convertible Preferred Stock has the right to receive upon a liquidation, winding-up or dissolution of Nestor, whether voluntary or involuntary, $1.00 per share before any distribution is made to the holders of Nestor common stock or on any other class of stock ranking junior to the Series B Convertible Preferred Stock. DIVIDENDS. Holders of Series B Convertible Preferred Stock shall be entitled to receive, when and as declared by the board of directors, dividends(or other distributions) equal to the amount of dividends (or other distributions) declared and paid on the number of shares of Nestor Common Stock into which such Series B Convertible Preferred Stock may be converted. VOTING RIGHTS. Holders of Series B Convertible Preferred Stock have the same voting rights as the holders of Nestor Common Stock on an as-converted basis. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is (i) a person who, together with affiliates and associates, owns 15% or more of the corporation's voting stock or (ii) an affiliate or associate of Nestor who was the owner, together with affiliates and associates, of 15% or more of our outstanding voting stock at any time within the 3-year period prior to the date for determining whether such person is "interested". Our certificate of incorporation contains certain provisions permitted under the General Corporation Law of Delaware relating to the liability of directors. The provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Further, our certificate of incorporation and By-laws contains provisions to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants and conversion of convertible securities, in the public market after this offering or the anticipation of those sales could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. As of June 21, 2005, 18,812,154 shares of our common stock were outstanding. Of these shares, 9,093,258 were freely transferable without restriction under the Securities Act, unless they were held by our "affiliates" as that term is used under the Securities Act and the rules and regulations promulgated thereunder. The remaining 9,718,896 shares of common stock held by existing stockholders are restricted shares. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 promulgated under the Securities Act, which rules are summarized below. Of those restricted shares, 9,605,841 shares are held by Silver Star Partners I, LLC, our affiliate, which has the right to require us to register those shares for resale. An additional 18,000 shares will be issued upon the conversion of our outstanding preferred stock, which may occur at any time at the holder's option. The shares that would be issued upon the conversion of our outstanding preferred stock would be freely tradable in the public market. There are also options and warrants outstanding to purchase approximately 3,158,331 shares of our common stock, of which 1,319,639 are -20- currently exercisable or will become exercisable in the next 60 days. The 1,130,927 shares offered by this prospectus are issuable upon the conversion of our outstanding convertible notes, which may occur at any time at the holder's option, and are not included in the above totals. In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year is entitled to sell within any three-month period up to that number of shares that does not exceed the greater of: (1) 1% of the number of shares of common stock then outstanding, which on June 21, 2005 was 18,812,154 shares, or (2) the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the sale. Sales under Rule 144 are also subject to certain "manner of sale" provisions and notice requirements and to the requirement that current public information about the issuer be available. Under Rule 144(k), a person who is not deemed to have been an affiliate of the issuer at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. PLAN OF DISTRIBUTION This prospectus covers 1,130,927 shares of our common stock. All of the shares offered are being sold by the selling stockholder. We will not realize any proceeds from the sale of the shares by the selling stockholder. The shares covered by this prospectus may be offered and sold from time to time by the selling stockholder. The term "selling stockholder" includes donees, pledgees, transferees or other successors-in-interest selling shares received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other non-sale related transfer. The selling stockholder will act independently of us in making decisions with respect to the timing, manner and size of each sale. Such sales may be made on one or more exchanges or in the over-the-counter market or otherwise, at prices and under terms then prevailing or at prices related to the then current market price or in negotiated transactions. The selling stockholder may sell its shares by one or more of, or a combination of, the following methods: o purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; o block trades in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o an over-the-counter distribution; o in privately negotiated transactions; and o in options transactions. In addition, any shares that qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. In connection with distributions of the shares or otherwise, the selling stockholder may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of the common stock in the course of -21- hedging the positions they assume with the selling stockholder. The selling stockholder may also enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The selling stockholder may also pledge shares to a broker-dealer or other financial institution, and, upon a default, such broker-dealer or other financial institution, may effect sales of the pledged shares pursuant to this prospectus (as supplemented or amended to reflect such transaction). In effecting sales, broker-dealers or agents engaged by the selling stockholder may arrange for other broker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the selling stockholder in amounts to be negotiated immediately prior to the sale. In offering the shares covered by this prospectus, the selling stockholder and any broker-dealers who execute sales for the selling stockholder may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. Any profits realized by the selling stockholder and the compensation of any broker-dealer may be deemed to be underwriting discounts and commissions. In order to comply with the securities laws of certain states, if applicable, the shares must be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. We have advised the selling stockholder that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholder and their affiliates. In addition, we will make copies of this prospectus available to the selling stockholder for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling stockholder may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act. At the time a particular offer of shares is made, if required, a prospectus supplement will be distributed that will set forth the number of shares being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public. We have agreed to indemnify the selling stockholder against certain liabilities, including certain liabilities under the Securities Act. We have agreed with the selling stockholder to keep the Registration Statement of which this prospectus constitutes a part effective until the earlier of: o such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the Registration Statement; o such time as all of the shares held by the selling stockholder may be sold to the public without registration or restriction pursuant to Rule 144 of the Securities Act.; or o May 16, 2007. LEGAL MATTERS The validity of the shares offered by this prospectus has been passed upon by Benjamin M. Alexander, Vice President, General Counsel and Secretary of Nestor. -22- EXPERTS Carlin, Charron & Rosen LLP, independent auditors, have audited our consolidated financial statements at December 31, 2004, 2003 and 2002, and for the years then ended, as set forth in their report. We have included our financial statements at December 31, 2004 and December 31, 2003 and for each of the years in the three year period ended December 31, 2004 in this prospectus and elsewhere in the registration statement in reliance on their reports given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other documents with the SEC. You may read and copy any document we file at the SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC filings are also available to you on the SEC's Internet site at http://www.sec.gov. This prospectus is part of a registration statement that we filed with the SEC. The registration statement contains more information than this prospectus regarding us and our common stock, including certain exhibits and schedules. You can obtain a copy of the registration statement from the SEC at the address listed above or from the SEC's Internet site. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate" into this prospectus information that we file with the SEC in other documents. This means that we can disclose important information to you by referring to other documents that contain that information. The information incorporated by reference is considered to be part of this prospectus. Information contained in this prospectus automatically updates and supersedes previously filed information. We are incorporating by reference the documents listed below and all of our filings pursuant to the Exchange Act after the date of filing the initial registration statement and prior to effectiveness of the registration statement. The following documents filed by Nestor with the SEC are incorporated herein by reference: o Our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 30, 2005. o Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, as filed with the SEC on May 16, 2005. o Our Current Report on Form 8-K, as filed with the SEC on June 2, 2005. o Our Current Report on Form 8-K, as filed with the SEC on June 22, 2005. Upon request, we will provide you, at no cost to you, a copy of any or all of the information that has been incorporated by reference in this prospectus. Requests may be made by email (investor@nestor.com) or telephone or by writing to: Nestor, Inc. 400 Massasoit Avenue, Suite 200 East Providence, Rhode Island 02914-2020 Attention: Nigel P. Hebborn (401) 434-5522 -23- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities being registered hereby, all of which will be borne by Nestor (except any underwriting discounts and commissions and expenses incurred by the selling stockholder for brokerage, accounting, tax or legal services or any other expenses incurred by the selling stockholder in disposing of the shares). All amounts shown are estimates except the Securities and Exchange Commission registration fee. Filing Fee - Securities and Exchange Commission ............. $ 738.76 Legal fees and expenses...................................... $ 2,000.00 Accounting fees and expenses................................. $ 10,000.00 Miscellaneous expenses....................................... $ 3,000.00 ------------ Total Expenses...................................... $ 15,738.76 ============ ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 102 of the Delaware General Corporation Law allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Nestor has included such a provision in its Amended and Restated Certificate of Incorporation. Section 145 of the General Corporation Law of Delaware provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Article SIXTH of Nestor, Inc.'s Amended and Restated Certificate of Incorporation provides that Nestor shall indemnify to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, each person who may be indemnified by Nestor pursuant thereto. Article NINTH of Nestor, Inc.'s Amended and Restated Certificate of Incorporation provides that no director of Nestor shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of Title 8 of the Delaware Code (relating to the Delaware General Corporation Law) or an amendment thereto or successor provision thereto or shall be liable by reason that, in addition to any and all other requirements for such liability, he (i) shall have breached his duty of loyalty to the corporation or its stockholders, (ii) shall not have acted in good faith or, in failing to act, shall not have acted in good faith, (iii) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law or (iv) shall have derived an improper personal benefit and further provides that neither the amendment nor II-1 repeal of Article NINTH, nor the adoption of any provision of the certificate of incorporation inconsistent with Article NINTH, shall eliminate or reduce the effect of Article NINTH in respect of any matter occurring, or any cause of action, suit or claim that, but for Article NINTH would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. Article VII of Nestor, Inc.'s Amended By-Laws provide that Nestor 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 Nestor to procure a judgment in its favor by reason of the fact that he is or was a director or officer of Nestor or is or was serving at the request of Nestor 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 Nestor), by reason of the fact that he is or was a director or officer of Nestor, or served at the request of Nestor 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. Nestor has purchased directors' and officers' liability insurance which would indemnify its directors and officers against damages arising out of certain kinds of claims which might be made against them based on their negligent acts or omissions while acting in their capacity as such. ITEM 16. EXHIBITS The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Registration Statement on Form S-2. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and II-2 (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are incorporated by reference in this Registration Statement. (2) That, for the purposes of determining any liability under the Securities Act, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of East Providence, State of Rhode Island, on June 22, 2005. NESTOR, INC. By: /s/ William B. Danzell ----------------------------------------- William B. Danzell, President and Chief Executive Officer SIGNATURES AND POWER OF ATTORNEY We, the undersigned officers and directors of Nestor, Inc., hereby severally constitute and appoint William B. Danzell and Nigel P. Hebborn and each of them singly, our true and lawful attorneys with full power to any of them, and to each of them singly, to sign for us and in our names in the capacities indicated below the Registration Statement on Form S-2 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement and generally to do all such things in our name and behalf in our capacities as officers and directors to enable Nestor, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William B. Danzell President, Chief Executive Officer and June 22, 2005 - ----------------------------- Chairman of the Board of Directors William B. Danzell (Principal Executive Officer) /s/ Harold A. Joannidi Treasurer and Chief Financial Officer June 22, 2005 - ----------------------------- (Principal Financial and Accounting Officer) Harold A. Joannidi /s/ George L. Ball Director June 22, 2005 - ----------------------------- George L. Ball /s/ Albert H. Cox, Jr. Director June 22, 2005 - ----------------------------- Albert H. Cox, Jr. /s/ Terry E. Fields Director June 22, 2005 - ----------------------------- Terry E. Fields /s/ David N. Jordan Director June 22, 2005 - ----------------------------- David N. Jordan
II-4 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant filed as Exhibit 4.1 to the Company's Registration Statement on Form S-2 (File No. 333-108432), filed September 2, 2003, is hereby incorporated herein by reference. 5.1 Opinion of Benjamin M. Alexander, Esq. 10.1 Asset Purchase Agreement and License Agreement between the Company and National Computer Systems, Inc., filed as an Exhibit to the Company's Current Report on Form 8-K dated June 11, 1996, is hereby incorporated by reference. 10.2 PRISM Non-Exclusive License Agreement between the Company and Applied Communications, Inc., filed as an Exhibit to the Company's Current Report on Form 8-K dated September 19, 1996, is hereby incorporated by reference. Portions of the Exhibit omitted, pursuant to a grant of confidential treatment. 10.3 License Agreement dated as of March 28, 1997, between Nestor, Inc. and Total System Services, Inc. filed as an Exhibit to the Company's Current report on Form 8-K dated April 8, 1997, is hereby incorporated by reference. Portions of the Exhibit omitted, pursuant to a grant of confidential treatment. 10.4 Amendment to the PRISM Non-Exclusive License Agreement dated as of April 18, 1997, between Nestor, Inc. and Applied Communications, Inc. filed as an Exhibit to the Company's Current Report on Form 8-K dated April 30, 1997 is hereby incorporated by reference. Portions of the Exhibit omitted pursuant to a grant of confidential treatment. 10.5 xclusive License Agreement between Nestor, Inc. and Nestor Traffic Systems, Inc. dated January 1, 1999 filed as an Exhibit to the Company's Current Report on Form 8-K dated March 25, 1999. 10.6 Secured Note Agreement by and among Nestor, Inc., Nestor Traffic Systems, Inc. and NTS Investors LLC dated January 9, 2001 and filed as an Exhibit to the Company's Current Report on Form 8-K on January 18, 2001 is hereby incorporated by reference. 10.7 License Agreement between Nestor, Inc. and ACI Worldwide, Inc. dated February 1, 2001 filed as an Exhibit to the Company's Current Report on Form 8-K on February 9, 2001 is hereby incorporated by reference. 10.8 License Agreement dated May 18, 2001 between the Company and Retail Decisions, Inc. filed as an exhibit to the Company's current report on Form 8K dated May 18, 2001 which is hereby incorporated by reference. 10.9 Security Purchase Agreement dated July 31, 2003 between Nestor, Inc. and Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003, which is hereby incorporated by reference. 10.10 Convertible Note dated July 31, 2003 made by Nestor, Inc. to Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003 which is hereby incorporated by reference. 10.11 Registration Rights Agreement dated July 31, 2003 between Nestor, Inc. and Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003, which is hereby incorporated by reference. 10.12 Common Stock Purchase Warrant dated July 31, 2003 issued by Nestor, Inc. to Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003 which is hereby incorporated by reference. II-5 Exhibit No. Description of Exhibit - ----------- ---------------------- 10.13 Stock Pledge Agreement dated July 31, 2003 between Nestor Traffic Systems, Inc. and Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003, which is hereby incorporated by reference. 10.14 Pledge and Security Agreement dated July 31, 2003 between CrossingGuard, Inc. and Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003 which is hereby incorporated by reference. 10.15 Guaranty dated July 31, 2003 by CrossingGuard, Inc. to Laurus Master Fund, Ltd. filed as an exhibit to the Company's current report on Form 8-K dated July 31, 2003 which is hereby incorporated by reference. 10.16 Nestor, Inc. Incentive Stock Option Plan, as amended, filed as an Exhibit to the Company's Registration Statement on Form S-8, filed May 5, 1987, is hereby incorporated herein by reference 10.17 Nestor, Inc. 1997 Incentive Stock Option Plan, as amended, filed as an Exhibit to the Company's Registration Statement on Form S-8, filed May 16, 1997, is hereby incorporated by reference. 10.18 Nestor Traffic Systems, Inc., Form of Subscription Agreement dated March 25, 1999, to sell a 37.5% equity position in its common stock and issue a warrant for an additional 17.5% common stock interest filed as an Exhibit to Nestor's Current Report on Form 8-K dated April 23, 1999 is hereby incorporated by reference. 10.19 Security Purchase Agreement dated January 14, 2004 between Nestor, Inc. and Laurus Master Fund, Ltd. filed as an Exhibit to Nestor's Current Report on Form 8-K dated December 31, 2003 is hereby incorporated by reference. 10.20 Convertible Note dated January 14, 2004 made by Nestor, Inc. to Laurus Master Fund, Ltd. filed as an Exhibit to Nestor's Current Report on Form 8-K dated December 31, 2003 is hereby incorporated by reference. 10.21 Registration Rights Agreement dated January 14, 2004 between Nestor, Inc. and Laurus Master Fund, Ltd. filed as an Exhibit to Nestor's Current Report on Form 8-K dated December 31, 2003 is hereby incorporated by reference. 10.22 Redemption and Conversion Agreement dated January 14, 2004 between Nestor, Inc. and Laurus Master Fund, Ltd. filed as an Exhibit to the Company's Registration Statement on Form S-2, as amended (File No. 333-108432), is hereby incorporated by reference. 10.23 Placement Agent Agreement dated December 24, 2003 among Nestor, Inc., Sanders Morris Harris, Inc., and Barrett & Company, Inc. filed as an Exhibit to the Company's Registration Statement on Form S-2, as amended (File No. 333-108432), is hereby incorporated by reference. 10.24 Registration Rights Agreement dated December 31, 2003 among Nestor, Inc., Sanders Morris Harris, Inc., and Barrett & Company, Inc. filed as an Exhibit to the Company's Registration Statement on Form S-2, as amended (File No. 333-108432), is hereby incorporated by reference. 10.25 Nestor, Inc. 2004 Stock Incentive Plan filed as an Exhibit to Nestor's Current Report on Form 8-K dated June 24, 2003 and filed as an Exhibit to the Company's Registration Statement on Form S-8 filed January 21, 2005, is hereby incorporated by reference. II-6 Exhibit No. Description of Exhibit - ----------- ---------------------- 10.26 Employment Agreement dated October 13, 2004 between Nestor, Inc. and William B. Danzell, filed as an Exhibit to Nestor's Current Report on Form 8-K dated October 13, 2004, is hereby incorporated by reference. 10.27 Employment Agreement dated October 13, 2004 between Nestor, Inc. and Nigel P. Hebborn, filed as an Exhibit to Nestor's Current Report on Form 8-K dated October 13, 2004, is hereby incorporated by reference. 10.28 Note Purchase Agreement dated November 5, 2004 between Nestor, Inc. and the purchasers named therein, filed as an Exhibit to Nestor's Current Report on Form 8-K dated November 5, 2004, is hereby incorporated by reference. 10.29 Registration Rights Agreement dated November 5, 2004 among Nestor, Inc. and the purchasers named therein, filed as an Exhibit to Nestor's Current Report on Form 8-K dated November 5, 2004, is hereby incorporated by reference. 10.30 Warrant to Purchase Common Stock, issued by Nestor, Inc. to Sanders Morris Harris, Inc. dated November 5, 2004, filed as an Exhibit to Nestor's Current Report on Form 8-K dated November 5, 2004, is hereby incorporated by reference. 10.31 Distributorship Agreement by and between Nestor, Inc. and Vitronics Machine Vision, Ltd. dated August 17, 2004 filed as an Exhibit to Nestor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is hereby incorporated by reference. 10.32 Incentive Stock Option Agreement by and between Nestor, Inc. and William B. Danzell dated October 13, 2004 filed as an Exhibit to Nestor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is hereby incorporated by reference. 10.33 Incentive Stock Option Agreement by and between Nestor, Inc. and William B. Danzell dated October 13, 2004 filed as an Exhibit to Nestor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is hereby incorporated by reference. 10.34 Incentive Stock Option Agreement by and between Nestor, Inc. and Nigel P. Hebborn dated October 13, 2004 filed as an Exhibit to Nestor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is hereby incorporated by reference. 10.35 Incentive Stock Option Agreement by and between Nestor, Inc. and Nigel P. Hebborn dated October 13, 2004 filed as an Exhibit to Nestor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, is hereby incorporated by reference. 10.36 Employment Agreement dated March 29, 2005 between Nestor, Inc. and Tadas A. Eikinas filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.37 Employment Agreement dated March 29, 2005 between Nestor, Inc. and Benjamin M. Alexander filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.38 Incentive Stock Option Agreement by and between Nestor, Inc. and Tadas A. Eikinas dated March 29, 2005 filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.39 Incentive Stock Option Agreement by and between Nestor, Inc. and Benjamin M. Alexander dated March 29, 2005 filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.40 Employment Offer Letter to Harold A. Joannidi from Nestor, Inc. dated March 29, 2005 filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. II-7 10.41 Bonus Targets Letter to William B. Danzell dated March 29, 2005 filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.42 Bonus Targets Letter to Nigel P. Hebborn dated March 29, 2005 filed as an Exhibit to Nestor's Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated by reference. 10.43 Lease Agreement between Nestor Traffic Systems, Inc.and Admiral Associates dated May 27, 2005 filed as an Exhibit to Nestor's Current Report on Form 8-K filed on June 2, 2005, is hereby incorporated by reference. 10.44 Convertible Note, dated May 16, 2005 made by Nestor, Inc. to Laurus Master Fund, Ltd. 10.45 Securities Purchase Agreement dated May 16, 2005, by and between Nestor, Inc., Nestor Traffic Systems, Inc. and Laurus Master Fund, Ltd. 10.46 Subsidiary Guaranty dated May 16, 2005 by Nestor, Inc. to Laurus Master Fund, Ltd. 10.47 Security Agreement by Nestor, Inc. and Nestor Traffic Systems, Inc. to Laurus Master Fund, Ltd. 10.48 Registration Rights Agreement dated May 16, 2005, between Nestor, Inc. and Laurus Master Fund, Ltd. 10.49 NTSI Pledge and Security Agreement dated May 16, 2005, between Laurus Master Fund, Ltd and Nestor Traffic Systems, Inc. 10.50 Common Stock Purchase Warrant dated May 16, 2005 by Nestor, Inc. to Laurus Master Fund, Ltd. 10.51 Allonge To Convertible Note by and between Nestor, Inc. and Laurus Master Fund, Ltd. dated June 3, 2005 13.1 Annual Report on Form 10-K for the fiscal year ended December 31, 2004* 13.2 Quarterly Report on Form 10-Q for the quarter ended March 31, 2004** 23.1 Consent of Carlin, Charron & Rosen LLP 23.2 Consent of Benjamin M. Alexander, Esq., included in Exhibit 5.1 24.1 Power of Attorney (See page II-4 of this Registration Statement) * - Previously filed with the SEC on March 30, 2005. ** - Previously filed with the SEC on May 16, 2005. II-8 EX-5 3 ex5_1bmaop.txt GENERAL COUNSEL OPINION EXHIBIT 5.1 ----------- Nestor, Inc 400 Massasoit Avenue, Suite 200 East Providence, RI 02914 22 June 2005 Nestor, Inc. 400 Massasoit Avenue, Suite 200 East Providence, Rhode Island 02914-2020 Re: Registration Statement on Form S-2 Ladies and Gentlemen: I am General Counsel to Nestor, Inc., a Delaware corporation (the "Company") and have acted as counsel in connection with a Registration Statement on Form S-2 (SEC File No. 333-______) (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), for the registration of an aggregate of 1,130,927 shares of Common Stock, $.01 par value per share (the "Shares"), of Nestor, Inc., a Delaware corporation (the "Company"), which Shares may be sold by a certain stockholder of the Company (the "Selling Stockholder"). 1,030,927 of the Shares (the "Conversion Shares") are to be issued by the Company to the Selling Stockholders upon conversion of a the principal amount of a convertible note (the "Convertible Note") issued by the Company to the Selling Stockholder on 16 May 2005 and 100,000 of the Shares (the "Warrant Shares") are to be issued by the Company to the Selling Stockholders upon the exercise of a purchase warrant (the "Warrant") issued by the Company to the Selling Stockholder on 16 June 2005. I am acting as counsel for the Company in connection with the sale by the Selling Stockholder of the Shares. I have examined signed copies of the Registration Statement as filed with the Commission. I have also examined and relied upon the Convertible Note, the Warrant, minutes of meetings of the stockholders and the Board of Directors of the Company, stock record books of the Company, the Certificate of Incorporation and By-Laws of the Company, each as restated and/or amended to date, and such other documents as I have deemed necessary for purposes of rendering the opinions hereinafter set forth. In my examination of the foregoing documents, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as copies, the authenticity of the originals of such latter documents and the legal competence of all signatories to such documents. Nestor, Inc. 22 June 2005 Page 2 I assume that the appropriate action will be taken, prior to the offer and sale of the Shares by the Selling Stockholder, to register and qualify the Shares for sale under all applicable state securities or "blue sky" laws. I express no opinion herein as to the laws of any state or jurisdiction other than the state laws of the State of Rhode Island, the General Corporation Law of the State of Delaware, including the statutory provisions and also all applicable provisions of the Delaware Constitution and reported judicial decisions interpreting these laws, and the federal laws of the United States of America. Based upon and subject to the foregoing, I am of the opinion that (i) the Conversion Shares have been duly and validly authorized for issuance and, when the Conversion Shares are issued upon the conversion of the Convertible Note in accordance with the terms of the Convertible Note, such Conversion Shares will be validly issued, fully paid and nonassessable and (ii) the Warrant Share have been duly and validly authorized for issuance and, when the Warrant Shares are issued upon the exercise of the Warrant in accordance with the terms of the Warrant, such Warrant Shares will be validly issued, fully paid and nonassessable. It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Please note that I am opining only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is based upon currently existing statutes, rules, regulations and judicial decisions, and I disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein. I hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of my name therein and in the related Prospectus under the caption "Legal Matters." In giving such consent, I do not hereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission. Very truly yours, /s/ Benjamin M. Alexander --------------------------- Benjamin M. Alexander EX-10 4 ex10_44note.txt CONVERTIBLE NOTE EXHIBIT 10.44 ------------- THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NESTOR, INC., THAT SUCH REGISTRATION IS NOT REQUIRED. CONVERTIBLE NOTE FOR VALUE RECEIVED, NESTOR, INC., a Delaware corporation (hereinafter called the "Borrower"), hereby promises to pay to LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the "Holder") or its registered assigns or successors in interest, on order, without demand, the sum of Six Million Dollars ($6,000,000), together with any accrued and unpaid interest and fees on May 16, 2008 (the "Maturity Date"). Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Securities Purchase Agreement dated as of the date hereof between the Borrower and the Holder (the "Purchase Agreement"). The following terms shall apply to this Note: ARTICLE I INTEREST & AMORTIZATION 1.1 (a) INTEREST RATE. Interest payable on this Note shall accrue at the "base rate" or "prime rate" published in the WALL STREET JOURNAL from time to time, plus four percent (4.00%) (such sum, the "Contract Rate") commencing on June 1, 2005 and be payable in arrears on the first day of each consecutive calendar month thereafter, and on the Maturity Date, accelerated or otherwise, due and payable as described below. The Contract Rate shall be increased or decreased as the case may be for each increase or decrease in the Prime Rate in an amount equal to such increase or decrease in the Prime Rate; each change to be effective as of the day of the change. Except pursuant to Section 1.1(b), the Contract Rate shall not at any time be less than six percent (6.00%). Interest shall be calculated on the basis of a 360 day year, provided however, that if the closing price of the Common Stock shall exceed $5.82 for a period of no less than five (5) consecutive trading days in a given calendar month, the Contract Rate shall be reduced to the "base rate" or "prime rate" published in the Wall Street Journal from time to time, plus two percent (2.00%) for such calendar month. 1 (b) CONTRACT RATE ADJUSTMENTS AND PAYMENTS. The Contract Rate shall be calculated on the last business day of each calendar month hereafter (other than for increases or decreases in the Prime Rate which shall be calculated and become effective in accordance with the terms of Section 1.1(a)) until the Maturity Date (each a "Determination Date") and shall be subject to adjustment as set forth herein. If (i) the Borrower shall have registered the shares of the Common Stock underlying the conversion of this Note and each Warrant on a registration statement declared effective by the Securities and Exchange Commission (the "SEC"), and (ii) the market price (the "Market Price") of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the five (5) trading days immediately preceding a Determination Date exceeds the then applicable Fixed Conversion Price by at least twenty-five percent (25%), the Contract Rate for the succeeding calendar month shall automatically be reduced by 200 basis points (200 b.p.) (2%) for each incremental twenty-five percent (25%) increase in the Market Price of the Common Stock above the then applicable Fixed Conversion Price. Notwithstanding the immediately foregoing, the Contract Rate shall not be less than 0.0%. 1.2 PRINCIPAL. The Borrower shall make repayments of principal on the Note as follows: - ---------------- ---------------------- ---------------- ---------------------- Date Principal Payment Date Principal Payment - ---------------- ---------------------- ---------------- ---------------------- 9/1/2005 181,818 2/1/2007 181,818 10/1/2005 181,818 3/1/2007 181,818 11/1/2005 181,818 4/1/2007 181,818 12/1/2005 181,818 5/1/2007 181,818 1/1/2006 181,818 6/1/2007 181,818 2/1/2006 181,818 7/1/2007 181,818 3/1/2006 181,818 8/1/2007 181,818 4/1/2006 181,818 9/1/2007 181,818 5/1/2006 181,818 10/1/2007 181,818 6/1/2006 181,818 11/1/2007 181,818 7/1/2006 181,818 12/1/2007 181,818 8/1/2006 181,818 1/1/2008 181,818 9/1/2006 181,818 2/1/2008 181,818 10/1/2006 181,818 3/1/2008 181,818 11/1/2006 181,818 4/1/2008 181,818 12/1/2006 181,818 5/1/2008 181,818 1/1/2007 181,818 - ---------------- ---------------------- ---------------- ---------------------- 2 ARTICLE II BORROWER PAYMENT OPTIONS 2.1 MONTHLY PAYMENTS IN CASH OR COMMON STOCK. The Borrower shall make monthly payments of (i) accrued and unpaid interest on the aggregate principal of the Note (plus any payments due and owing under the Purchase Agreement and the Note not previously paid) and (ii) payments of principal according to the schedule set forth in Section 1.2 hereof (collectively, the "Monthly Amount") beginning on September 1, 2005 and on the first day of each consecutive calendar month thereafter (each a "Repayment Date"). Subject to the terms hereof, the Borrower has the sole option to determine whether to satisfy payment of the Monthly Amount in full on each Repayment Date either in cash or in shares of Common Stock, or a combination of both. The Borrower shall deliver to the Holder a written irrevocable notice in the form of Exhibit B attached hereto electing to pay such Monthly Amount in full on such Repayment Date in either cash or Common Stock, or a combination of both ("Repayment Election Notice"). Such Repayment Election Notice shall be delivered to the Holder at least ten (10) days prior to the applicable Repayment Date (the date of such notice being hereinafter referred to as the "Notice Date"). If such Repayment Election Notice is not delivered within the prescribed period set forth in the preceding sentence, then the repayment shall be made in cash. If the Borrower elects or is required to repay all or a portion of the Monthly Amount in cash on a Repayment Date, then, with respect to the portion of the Monthly Amount to be paid in cash, on such Repayment Date the Borrower shall pay to the Holder an amount equal to (x) 103% of the principal portion of the Monthly Amount plus (y) any accrued and unpaid interest in satisfaction of such obligation. If the Borrower repays all or a portion of the Monthly Amount in shares of Common Stock, the number of such shares to be issued for such Repayment Date shall be the number determined by dividing (x) the portion of the Monthly Amount to be paid in shares of Common Stock, by (y) 5.82 (the "Fixed Conversion Price"). 2.2 No EFFECTIVE REGISTRATION. Notwithstanding anything to the contrary herein, the Borrower shall be prohibited from exercising its right to repay the Monthly Amount in shares of Common Stock (and must deliver cash in respect thereof) on the applicable Repayment Date if at any time from the Notice Date until the time at which the Holder receives such shares there fails to exist an effective registration statement or an Event of Default hereunder exists or occurs, unless otherwise waived in writing by the Holder in whole or in part at the Holder's option. 3 2.3 COMMON STOCK PAYMENT RESTRICTIONS. Notwithstanding anything to the contrary herein, for the avoidance of doubt, (a) if the volume weighted average price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for each of the 10 trading days preceding a Repayment Date was greater than 120% of the Fixed Conversion Price, the Borrower may elect to pay all or a portion of the Monthly Amount in shares of Common Stock; (b) if the volume weighted average price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for any of the 10 trading days preceding a Repayment Date was less than 120% of the Fixed Conversion Price, and the Borrower has elected to pay all or a portion of the Monthly Amount in shares of Common Stock, then, instead of the Borrower delivering the required number of shares of Common Stock on the Repayment Date, the Holder and the Borrower may mutually agree to convert an amount equal to what the Borrower elected to pay in shares of Common Stock at a conversion price equal to 87% of the volume weighted average price of the three (3) lowest days during the twenty (20) trading days immediately preceding the Repayment Date. Any part of the Monthly Amount not converted into shares of Common Stock by the following Repayment Date shall be paid by the Borrower in cash on such following Repayment Date. Any such cash payments not made on or before such repayment Date shall be added to the next succeeding Monthly Amount. At any time during the relevant month or mutual agreement per above is not attained, the Borrower shall pay the Monthly Amount, or the unconverted part thereof, in cash and the conversion price set forth in this Section 2.3 shall no longer be applicable. 2.4 OPTIONAL PREPAYMENTS IN COMMON STOCK. In the event that the Common Stock trades on the Principal Market at a volume weighted average price greater than 120% of the Fixed Conversion Price for a period of at least ten (10) consecutive trading days, then the Borrower may, at its sole option, provide the Holder written notice ("Call Notice") requiring the conversion at the Fixed Conversion Price of all or a portion of the Note held by the Holder (subject to the limitation provided for in Section 3.3) as of the date set forth in such Call Notice (the "Call Date"). The Call Date shall be at least twenty (20) trading days following the date of the Call Notice, provided a registration statement covering resales of that number of Conversion Shares provided for in the Call Notice has been declared effective and is available for use. The number of Conversion Shares to be issued in connection with any such conversion pursuant to a particular Call Notice pursuant to this Section 3.9 shall not exceed 25% of the aggregate dollar trading volume of the Common Stock for the twenty (20) trading days immediately preceding the Call Date. If the price of the Common Stock falls below 120% of the Conversion Price during the twenty (20) trading day period preceding the Call Date, then the Holder will no longer be required to convert the Note pursuant to such Call Notice. The Borrower shall not be permitted to give the Holder more than one notice during any 20-day period. 4 2.5 The Borrower may prepay this Note ("Optional Redemption") by paying to the Holder a sum of money equal to one hundred fifteen percent (115%) of the Principal Amount outstanding at such time together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Purchase Agreement or any other Related Agreement (the "Redemption Amount") outstanding on the Redemption Payment Date (as defined below). The Borrower shall deliver to the Holder a written notice of redemption (the "Notice of Redemption") specifying the date for such Optional Redemption (the "Redemption Payment Date"), which date shall be not earlier than seven (7) days after the date of the Notice of Redemption (the "Redemption Period"). A Notice of Redemption shall not be effective with respect to any portion of this Note for which the Holder has previously delivered a Notice of Conversion (as hereinafter defined) or for conversions elected to be made by the Holder pursuant to Section 3.3 during the Redemption Period. The Redemption Amount shall be determined as if the Holder's conversion elections had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Borrower fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Redemption Notice will be null and void A Notice of Redemption may be given by the Borrower, provided no Event of Default, as described in the Note, shall have occurred or be continuing. 2.6 Upon a Change of Control (as defined below) occurring with respect to the Borrower, unless Holder shall have expressly consented to such Change of Control in writing, Borrower shall prepay this Note in accordance with Section 2.5. A "Change of Control" shall mean any event or circumstance as a result of which (i) any "Person" or "group" (as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other than the Holder, is or becomes the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a fully diluted basis of the then outstanding voting equity interest of the Borrower (other than a "Person" or "group" that beneficially owns 35% or more of such outstanding voting equity interests of the Borrower on the date hereof), (ii) the Board of Directors of the Borrower shall cease to consist of a majority of the Borrower's board of directors on the date hereof (or directors nominated or elected by (x) a majority of the board of directors in effect immediately prior to such nomination or election (y) a "Person" or "group" that beneficially owns 35% or more of such outstanding voting equity interests of the Borrower on the date hereof) or (iii) the Borrower or any of its Subsidiaries merges or consolidates with, or sells all or substantially all of its assets to, any other person or entity. 5 ARTICLE III CONVERSION RIGHTS 3.1. HOLDER'S CONVERSION RIGHTS. If the closing price of the Common Stock is greater than the Fixed Conversion Price, and the registration statement required by Section 10 of the Purchase Agreement has been declared effective by the Securities Exchange Commission, the Holder shall have the right, but not the obligation to convert the principal portion of this Note and/or interest due and payable into fully paid and nonassessable shares of common stock of the Borrower as such stock exists on the date of issuance of this Note. 3.2 CONVERSION MECHANICS. (a) The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and interest and fees of the Note to be converted, if any, by the Fixed Conversion Price as of the Conversion Date. In the event of any conversions of outstanding principal amount under this Note in part pursuant to this Article III, such conversions shall be deemed to constitute conversions of outstanding principal amount applying to Monthly Amounts for the Repayment Dates in chronological order. By way of example, if the original principal amount of this Note is $6,000,000 and the Holder converted $400,000 of such original principal amount prior to the first Repayment Date, then (1) the principal amount of the Monthly Amount due on the first Repayment Date would equal $0, (2) the principal amount of the Monthly Amount due on the second Repayment Date would equal $0 and (3) the principal amount of the Monthly Amount due on the third Repayment Date would be $145,454. The Borrower shall deliver a Notice of Conversion as described in Section 9 of the Securities Purchase Agreement entered into between the Borrower and the Holder relating to this Note (the "Purchase Agreement") of the Holder's written request for conversion (the date of giving such notice of conversion being a "Conversion Date"). (b) The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows: (A) RECLASSIFICATION. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed 6 to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock (i) immediately prior to or (ii) immediately after, such reclassification or other change at the sole election of the Holder; provided however, that in the event of an election pursuant to (i), Holder shall convert the balance of the Note within 15 days of such reclassification. (B) STOCK SPLITS, COMBINATIONS AND DIVIDENDS. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock or any preferred stock issued by the Borrower in shares of Common Stock, the Fixed Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. (C) SHARE ISSUANCES. Subject to the provisions of this Section 3.2, if the Borrower shall at any time prior to the conversion or repayment in full of the Principal Amount issue any shares of Common Stock or securities convertible into Common Stock to a Person other than the Holder (except (i) pursuant to Sections 3.2(b) (A) or (B) above; (ii) pursuant to options, warrants, or other obligations to issue shares outstanding on the date hereof as disclosed to the Holder in writing; or (iii) pursuant to options that may be issued under any employee incentive stock option and/or any qualified stock option plan adopted by the Borrower) for a consideration per share (the "Offer Price") less than the Fixed Conversion Price in effect at the time of such issuance, then the Fixed Conversion Price shall be immediately reset pursuant to the formula below. For purposes hereof, the issuance of any security of the Borrower convertible into or exercisable or exchangeable for Common Stock shall result in an adjustment to the Fixed Conversion Price upon the issuance of such securities. If the Borrower issues any additional shares of Common Stock for a consideration per share less than the then-applicable Fixed Conversion Price pursuant to this Section 3.2 then, and thereafter successively upon each such issue, the Fixed Conversion Price shall be adjusted by multiplying the then applicable Fixed Conversion Price by the following fraction: A + B -------------------------------------- (A + B) + [((C - D) x B) / C] A = Total amount of shares convertible pursuant to this Note B = Actual shares sold in the offering C = Fixed Conversion Price D = Offer Price 7 (D) COMPUTATION OF CONSIDERATION. For purposes of any computation respecting consideration received pursuant to Section 3.2(c) above, the following shall apply: (i) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Borrower for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Borrower (irrespective of the accounting treatment thereof); and (iii) upon any such exercise, the aggregate consideration received for such securities shall be deemed to be the consideration received by the Borrower for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Borrower upon the conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in subsections (ii) and (iii) of this Section 3.2(d). 3.3 ISSUANCE OF NEW NOTE. This Note may be converted by the Borrower or Holder in whole or in part as described herein and Section 9 of the Purchase Agreement. Upon partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder and upon the cancellation of this Note, be issued by the Borrower to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Borrower will pay no costs, fees or any other consideration to the Holder for the production and issuance of a new Note. 8 ARTICLE IV EVENTS OF DEFAULT If an Event of Default occurs and is continuing, the Borrower's rights under Article II shall immediately cease and be of no further effect until such time as the Event of Default has been cured or waived by the Holder. Upon the occurrence and continuance of an Event of Default beyond any applicable grace period, the Holder may make all sums of principal, interest and other fees then remaining unpaid hereon and all other amounts payable hereunder due and payable within five (5) days of written notice from Holder to Borrower (each period being a "Default Notice Period") of an Event of Default (as defined below). In the event of such an acceleration, the amount due and owing to the Holder shall be 130% of the outstanding principal amount of the Note (plus accrued and unpaid interest and fees, if any) (the "Acceleration Rate") until such Event of Default shall have been cured or waived in writing by the Holder, if applicable. If during the Default Notice Period, Borrower cures the Event of Default (other than a payment default described in section 4.1 below), the Event of Default will no longer exist and any rights Holder had pertaining to or arising from the Event of Default will no longer exist. If after the Default Notice Period the Borrower has not repaid in full amount then due hereunder, then, and only then, the conversion price hereunder shall be reduced and shall be equal to the lower of (i) the Fixed Conversion Price; or (ii) seventy percent (70%) of the average of the three lowest closing prices for the Common Stock on the Principal Market, for the thirty (30) trading days prior to but not including the Conversion Date until such Event of Default shall have been cured or waived in writing by the Holder. The "Principal Market" shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock, or any securities exchange or other securities market on which the Common Stock is then being listed or traded. The occurrence of any of the following events is an Event of Default ("Event of Default"): 4.1 FAILURE TO PAY PRINCIPAL, INTEREST OR OTHER FEES. The Borrower fails to pay any installment of principal, interest or other fees hereon or on any other promissory note issued pursuant to the Purchase Agreement and this Note, when due and such failure continues for a period of fourteen (14) business days after the due date. 4.2 BREACH OF COVENANT. The Borrower breaches any material covenant or other term or condition of this Note or the Purchase Agreement (other than Section 12.7 of the Purchase Agreement) in any material respect and such breach, if subject to cure, continues for a period of twenty (20) days after written notice to the Borrower from the Holder. 9 4.3 BREACH OF REPRESENTATIONS AND WARRANTIES. Any material representation or warranty of the Borrower made herein, in the Purchase Agreement, or in any agreement, statement or certificate given in writing pursuant hereto or in connection therewith shall be false or misleading and shall not be cured for a period of twenty (20) business days after written notice thereof is received by the Borrower from the Holder. 4.4 BANKRUPTCY, RECEIVER OR TRUSTEE. Pledgor shall (i) apply for, consent to, or suffer to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or other fiduciary of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within ninety (90) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing.. 4.5 JUDGMENTS. Any money judgment, writ or similar final process shall be entered or filed against the Borrower or any of its property or other assets for more than $500,000, and shall remain unvacated, unbonded or unstayed for a period of ninety (90) days. 4.6 An Event of Default, as defined in any Related Agreement, shall occur and be continuing beyond any applicable grace period. 4.7 STOP TRADE. An SEC stop trade order or Principal Market trading suspension of the Common Stock for 5 consecutive days or 5 days during a period of 10 consecutive days, excluding in all cases a suspension of all trading on a Principal Market, provided that the Borrower shall not have been able to cure such trading suspension within 30 days of the notice thereof or list or trade the Common Stock on another Principal Market within 60 days of such notice. 4.8 FAILURE TO DELIVER COMMON STOCK OR REPLACEMENT NOTE. The Borrower's failure to timely deliver Common Stock to the Holder pursuant to and in the form required by this Note and Section 9 of the Purchase Agreement, or if required a replacement Note when due and such failure continues for a period of seven (7) business days after the due date. 4.9 The Borrower or NTSI breaches the covenant contained in Section 12.7 of the Purchase Agreement) in any material respect. 10 DEFAULT RELATED PROVISIONS 4.10 PAYMENT GRACE PERIOD. The Borrower shall have a three (3) business day grace period to pay any monetary amounts due under this Note or the Purchase Agreement, after which grace period a default interest rate of five percent (5%) per annum above the then applicable interest rate hereunder shall apply to the monetary amounts due. 4.11 CONVERSION PRIVILEGES. The conversion privileges set forth in Article III shall remain in full force and effect immediately from the date hereof and until the Note is paid in full. ARTICLE V MISCELLANEOUS 5.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.2 NOTICES. Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when sent by telephonically confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Borrower at the address as set forth on the signature page to the Purchase Agreement executed in connection herewith, with a copy to Benjamin M. Alexander, Esq., Nestor, Inc., 400 Massasoit Avenue, Suite 200, East Providence 02914 , and to the Holder at the address set forth on the signature page to the Purchase Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 3rd Ave. , 11 14th Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such other address as the Borrower or the Holder may designate by ten days advance written notice to the other parties hereto. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Purchase Agreement. 5.3 AMENDMENT PROVISION. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 5.4 ASSIGNABILITY. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder after written notice to Borrower. 5.5 GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. Both parties and the individual signing this Note on behalf of the Borrower agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. 5.6 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 5.7 SECURITY INTEREST. The holder of this Note has been granted a security interest in certain assets of the Borrower more fully described in a Security Agreement. 5.8 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party 12 against the other. The titles of the articles and sections of this Note are for convenience of reference only and are not to be considered in construing this Note. 13 IN WITNESS WHEREOF, each Borrower has caused this Note to be signed in its name effective as of this 16th day of May, 2005. NESTOR, INC. By: /s/ Nigel P. Hebborn ------------------------------------------- Nigel P. Hebborn Executive Vice President WITNESS: /s/Mary Ann Branin - ------------------------------- Mary Ann Branin Executive Assistant 14 EXHIBIT A NOTICE OF CONVERSION (To be executed by the Holder in order to convert the Note) The undersigned hereby elects to convert $_________ of the principal due on the Note issued by NESTOR, INC. on May ___, 2005 into Shares of Common Stock of NESTOR, INC. (the "Borrower") according to the conditions set forth in such Note, as of the date written below. Date of Conversion: ------------------------------------------------------------- Shares To Be Delivered: --------------------------------------------------------- Signature: ---------------------------------------------------------------------- Print Name: --------------------------------------------------------------------- Address: ------------------------------------------------------------------------ 15 EXHIBIT B FORM OF REPAYMENT ELECTION NOTICE To: [HOLDER AT HOLDER'S ADDRESS] Pursuant to Section 2.1 of the Note of Nestor, Inc. issued on July __, 2003, we hereby notify you that we are irrevocably electing to repay the outstanding Monthly Amount (as defined in the Note) due on the Repayment Date (as defined in the Note) which occurs on ______, 20__ (CHECK ONE): _____ In full in cash on such Repayment Date. _____In full in shares of the Borrower's Common Stock within three (3) trading days following such Repayment Date. _____In part in cash in the amount of $______ on such Repayment Date, and in part in shares of the Borrower's Common Stock (in the amount of _________ shares) within three (3) trading days following such Repayment Date. Nestor, Inc. By: ------------------------------------ Name: Title: 16 EX-10 5 ex10_45secpurchase.txt SECURITIES PURCHASE AGREEMENT EXHIBIT 10.45 ------------- NESTOR, INC. SECURITIES PURCHASE AGREEMENT May 16, 2005 TABLE OF CONTENTS Page 1. AGREEMENT TO SELL AND PURCHASE...........................................1 2. FEES AND WARRANT.........................................................1 3. CLOSING, DELIVERY AND PAYMENT............................................2 3.1 Closing.........................................................2 3.2 Delivery........................................................2 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................2 4.1 Organization, Good Standing and Qualification...................2 4.2 Subsidiaries....................................................3 4.3 Capitalization; Voting Rights...................................3 4.4 Authorization; Binding Obligations..............................4 4.5 Liabilities.....................................................4 4.6 Agreements; Action..............................................4 4.7 Obligations to Related Parties..................................5 4.8 Changes.........................................................5 4.9 Title to Properties and Assets; Liens, Etc......................6 4.10 Intellectual Property...........................................7 4.11 Compliance with Other Instruments...............................7 4.12 Litigation......................................................7 4.13 Tax Returns and Payments........................................8 4.14 Employees.......................................................8 4.15 Registration Rights and Voting Rights...........................8 4.16 Compliance with Laws; Permits...................................9 4.17 Environmental and Safety Laws...................................9 4.18 Valid Offering..................................................9 4.19 Full Disclosure.................................................9 4.20 Insurance......................................................10 4.21 SEC Reports....................................................10 4.22 No Market Manipulation.........................................10 4.23 Listing........................................................10 4.24 No Integrated Offering.........................................10 4.25 Stop Transfer..................................................10 -i- 4.26 Dilution.......................................................11 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................11 5.1 Requisite Power and Authority..................................11 5.2 Investment Representations.....................................11 5.3 Purchaser Bears Economic Risk..................................11 5.4 Acquisition for Own Account....................................12 5.5 Purchaser Can Protect Its Interest.............................12 5.6 Accredited Investor............................................12 5.7 Legends........................................................12 5.8 No Shorting....................................................12 5.8 Volume Limitation..............................................12 6. COVENANTS OF THE COMPANY................................................13 6.1 Stop-Orders....................................................13 6.2 Listing........................................................13 6.3 Market Regulations.............................................14 6.4 Reporting Requirements........................................14 6.5 Use of Funds...................................................14 6.6 Access to Facilities...........................................14 6.7 Taxes..........................................................14 6.8 Insurance......................................................14 6.9 Intellectual Property..........................................15 6.10 Properties.....................................................15 6.11 Confidentiality................................................15 6.12 Required Approvals.............................................15 6.13 Reissuance of Securities.......................................15 6.14 Opinion........................................................16 7. COVENANTS OF THE PURCHASER..............................................17 7.1 Confidentiality................................................16 8. COVENANTS OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION.......16 8.1 Company Indemnification........................................16 8.2 Purchaser's Indemnification....................................16 8.2 Procedures.....................................................16 -ii- 9. CONVERSION OF CONVERTIBLE NOTE..........................................17 9.1 Mechanics of Conversion........................................17 9.2 Maximum Conversion.............................................18 9.3 Optional Redemption.............................................. 10. REGISTRATION RIGHTS.....................................................19 10.1 Registration Rights Granted....................................19 10.2 Registration Procedures........................................20 10.3 Provision of Documents.........................................21 10.4 Non-Registration Events........................................21 10.5 Expenses.......................................................21 10.6 Indemnification and Contribution...............................22 11. OFFERING RESTRICTIONS...................................................24 12. SECURITY INTEREST.......................................................24 13. MISCELLANEOUS...........................................................24 13.1 Governing Law..................................................24 13.2 Survival.......................................................24 13.3 Successors and Assigns.........................................25 13.4 Entire Agreement...............................................25 13.5 Severability...................................................25 13.6 Amendment and Waiver...........................................25 13.7 Delays or Omissions............................................25 13.8 Notices........................................................25 13.9 Attorneys' Fees................................................26 13.10 Titles and Subtitles...........................................26 13.11 Counterparts...................................................26 13.12 Broker's Fees..................................................26 13.13 Construction...................................................26 -iii- NESTOR, INC. SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered into as of May 16, 2005, by and between Nestor, Inc., a Delaware corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale to the Purchaser of a convertible note in the aggregate principal amount of $6,000,000 (the "Note"), which Note is convertible into shares of the Company's common stock, $0.01 par value per share (the "Common Stock") at a fixed conversion price of $5.82 per share of Common Stock ("Fixed Conversion Price"); WHEREAS, the Company wishes to issue a warrant to the Purchaser to purchase shares of the Company's Common Stock in connection with Purchaser's purchase of the Note; WHEREAS, Purchaser desires to purchase the Note and Warrant on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Note and Warrant to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company a Note in the amount of $6,000,000 convertible in accordance with the terms thereof into shares of the Company's Common Stock in accordance with the terms of the Note and this Agreement. The Note purchased on the Closing Date shall be known as the "Offering." A form of the Note is annexed hereto as Exhibit A. The Note will have a Maturity Date (as defined in the Note) twenty four (24) months from the date of issuance. Collectively, the Note and Warrant (as defined in Section 2) and Common Stock issuable in payment of the Note, upon conversion of the Note and upon exercise of the Warrant are referred to as the "Securities." 2. FEES AND WARRANT. On the Closing Date: (a) The Company will issue and deliver to the Purchaser a Warrant to purchase 100,000 shares of Common Stock in connection with the Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant must be delivered on the Closing Date. A form of Warrant is annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings, and indemnification, and -1- other rights made or granted to or for the benefit of the Purchaser by the Company are hereby also made and granted in respect of the Warrant and shares of the Company's Common Stock issuable upon exercise of the Warrant (the "Warrant Shares"). (b) Upon execution and delivery of this Agreement by the Company and Purchaser, the Company shall pay to Laurus Capital Management, manager of the Purchaser, (i) a closing payment in an amount equal to three and nine tenths percent (3.90%) of the aggregate principal amount of the Note. The foregoing fee is referred to herein as the "Closing Payment". (c) The Company shall reimburse the Purchaser for its reasonable legal fees for services rendered to the Purchaser in preparation of this Agreement and the Related Agreements, and expenses in connection with the Purchaser's due diligence review of the Company and relevant matters. Amounts required to be paid hereunder will be paid at the Closing and shall not exceed $39,500. (d) The deposit of $15,000 made by the Company on or about May , 2005 shall be credited against the Closing Payment and legal fees. The balance of the Closing Payment and legal fees shall be paid at the Closing out of funds held pursuant to a Funds Escrow Agreement, of even date herewith among the Company, Purchaser and an Escrow Agent (the "Funds Escrow Agreement"). 3. CLOSING, DELIVERY AND PAYMENT. 3.1 CLOSING. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "Closing"), shall take place on the date hereof, at such time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "Closing Date"). 3.2 DELIVERY. Pursuant to the Funds Escrow Agreement, in the form attached as Exhibit C, at the Closing, subject to the terms and conditions hereof, the Company will deliver to the Escrow Agent, among other things, a Note in the form attached as Exhibit A representing the principal amount of $6,000,000 and a Common Stock Purchase Warrant in the form attached as Exhibit B in the Purchaser's name representing 100,000 Warrant Shares and the Purchaser will deliver to the Escrow Agent, among other things, $6,000,000, by certified funds or wire transfer made payable to the order of the Escrow Agent. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as of the date of this Agreement as set forth below which disclosures are supplemented by, and subject to the Company's filings and other filings identifying the Company as issuer under the Securities Exchange Act of 1934 and the draft of a Quarterly Report on Form 10-Q for the period ended March 31, 2005 (collectively, the "Exchange Act Filings"), copies of which have been provided to the Purchaser. 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws -2- of the State of Delaware. The Company has the corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, the Warrant to be issued in connection with this Agreement (in the case of the Company only), the agreements set forth on Schedule 4.1 attached hereto and all other agreements referred to herein (collectively, the "Related Agreements"), to issue and sell the Note and the shares of Common Stock issuable upon conversion of the Note (the "Note Shares") (in the case of the Company only), to issue and sell the Warrant and the Warrant Shares (in the case of the Company only), and to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as presently conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so has not, or could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the Company and its Subsidiaries, taken individually and as a whole (a "Material Adverse Effect"). 4.2 SUBSIDIARIES. Except as disclosed on Schedule 4.2, the Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. 4.3 CAPITALIZATION; VOTING RIGHTS. (a) The authorized capital stock of the Company, as of May 10, 2005, consists of 30,000,000 shares of Common Stock, par value $0.01 per share, shares of which 18,777,790 are issued and outstanding and 10,000,000 shares of preferred stock, par value $1.00 per share of which shares 180,000 are outstanding. (b) Except as disclosed on Schedule 4.3, other than (i) the shares reserved for issuance under the Company's stock option plans; and (ii) shares which may be granted pursuant to this Agreement and the Related Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. Neither the offer, issuance or sale of any of the Note or Warrant, or the issuance of any of the Note Shares or Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. (c) All issued and outstanding shares of the Company's Common Stock (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Company's Certificate of Incorporation (the "Charter"). The Note Shares and Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Company's Charter, the Securities will be validly -3- issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 4.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers and directors necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder at the Closing and, the authorization, sale, issuance and delivery of the Note and Warrant has been taken or will be taken prior to the Closing. The Agreement and the Related Agreements, when executed and delivered and to the extent it is a party thereto, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable or legal remedies. The sale of the Note and the subsequent conversion of the Note into Note Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrant and the subsequent exercise of the Warrant for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The Note and the Warrant, when executed and delivered in accordance with the terms of this Agreement, will be valid and binding obligations of the Company, enforceable in accordance with their respective terms. 4.5 LIABILITIES. Except as set forth in Schedule 4.5, the Company, to the best of its knowledge, knows of no material contingent liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings. 4.6 AGREEMENTS; ACTION. Except as set forth on Schedule 4.6 or as disclosed in any Exchange Act Filings: (a) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or to its knowledge by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase or sale of "off the shelf" or other standard products), or (iii) provisions restricting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights (other than obligations of the Company arising from purchase or sale agreements entered into in the ordinary course of business). (b) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $50,000 or, in the case of -4- indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person not in excess, individually or in the aggregate, of $100,000, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (d) The Company maintains disclosure controls and procedures ("Disclosure Controls") designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission ("SEC"). (e) The Company makes and keep books, records, and accounts, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets. The Company maintains internal control over financial reporting ("Financial Reporting Controls") designed by, or under the supervision of, the Company's principal executive and principal financial officers, and effected by the Company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"), including that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements are prevented or timely detected; (iii) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and board of directors; (iv) transactions are recorded as necessary to maintain accountability for assets; and (v) the recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences. -5- (f) There is no weakness in any of the Company's Disclosure Controls or Financial Reporting Controls that is required to be disclosed in any of the Exchange Act Filings, except as so disclosed. 4.7 OBLIGATIONS TO RELATED PARTIES. Except as set forth on Schedule 4.7, there are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered and for bonus payments, (b) reimbursement for reasonable expenses incurred on behalf of the Company, (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company) and (d) obligations listed in the Company's financial statements or disclosed in any of its Exchange Act Filings. Except as described above or set forth on Schedule 4.7, none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company, individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than 1% of such company) which may compete with the Company. Except as described above, no officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. Except as set forth on Schedule 4.7, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 4.8 CHANGES. Since December 31, 2004, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement or to any of the Related Agreements, there has not been: (a) Any change in the assets, liabilities, financial condition, prospects or operations of the Company, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is reasonably expected to have a Material Adverse Effect (b) Any resignation or termination of any officer, key employee or group of employees of the Company; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of the Company; (e) Any waiver by the Company of a valuable right or of a material debt owed to it; -6- (f) Any direct or indirect material loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity related to the Company; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (l) Any change in any material agreement to which the Company is a party or by which it is bound which may materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company; (m) Any other event or condition of any character that, either individually or cumulatively, has or may materially and adversely affect the business, assets, liabilities, financial condition, prospects or operations of the Company; or (n) Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above. 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except as set forth on Schedule 4.9, the Company has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent, (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on Schedule 4.9, the Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 4.10 INTELLECTUAL PROPERTY. (a) The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and to the Company's knowledge as presently proposed to be conducted (the "Intellectual Property"), without any known -7- infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. (b) Except as set forth on Schedule 4.10(b), the Company has not received any communications alleging that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company aware of any basis therefor. (c) The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company. 4.11 COMPLIANCE WITH OTHER INSTRUMENTS. Except as set forth on Schedule 4.11, the Company is not in violation or default of any term of its Charter or Bylaws, or of any material provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements to which it is a party, and the issuance and sale of the Note by the Company and the other Securities by the Company each pursuant hereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 4.12 LITIGATION. Except as set forth on Schedule 4.12, there is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that prevents the Company to enter into this Agreement or the Related Agreements, or to consummate the transactions contemplated hereby or thereby, or which might have or result, in aMaterial Adverse Effect, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 4.13 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (federal, state and local) required to be filed by it. Except as set forth on Schedule 4.13, all taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent. Except as set forth on Schedule 4.13, the Company has not been advised (a) that any of its returns, federal, state or -8- other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 4.14 EMPLOYEES. Except as set forth on Schedule 4.14, the Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. Except as disclosed in the Exchange Act Filings, the Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company. The Company has not received any notice alleging that any such violation has occurred. Except for employees who have a current effective employment agreement with the Company, no employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. The Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees. 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS. Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, the Company is presently not under any obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. To the Company's knowledge, no stockholder of the Company has entered into any agreement with respect to the voting of equity securities of the Company. 4.16 COMPLIANCE WITH LAWS; PERMITS. Except as set forth on Schedule 4.16, to its knowledge, the Company is not in violation in any material respect of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of any of the Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the -9- Closing, as will be filed in a timely manner. The Company has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which would materially and adversely affect the business, properties, prospects or financial condition of the Company. 4.17 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, except for any violations that, individually or in the aggregate, have not had and would not reasonably be expected materially and adversely affect the business, properties, prospects or financial condition of the Company, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. No Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company, except for any use, storage or disposal that, individually or in the aggregate, have not had and would not reasonably be expected materially and adversely affect the business, properties, prospects or financial condition of the Company. For the purposes of the preceding sentence, "Hazardous Materials" shall mean (a) materials which are listed or otherwise defined as "hazardous" or "toxic" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials, or (b) any petroleum products or nuclear materials. 4.18 VALID OFFERING. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. 4.19 FULL DISCLOSURE. The Company has provided the Purchaser with all information requested by the Purchaser in connection with its decision to purchase the Note and Warrant, including all information the Company believes is reasonably necessary to make such investment decision. Neither this Agreement, the exhibits and schedules hereto, the Related Agreements nor any other document delivered by the Company to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Any financial projections and other estimates provided to the Purchaser by the Company were based on the Company's experience in the industry and on assumptions of fact and opinion as to future events which the Company, at the date of the issuance of such projections or estimates, believed to be reasonable 4.20 INSURANCE. The Company has general commercial, product liability, fire and casualty insurance policies with coverage customary for companies similarly situated to the Company in the same or similar business. -10- 4.21 SEC REPORTS. The Company has filed all proxy statements, reports and other documents required to be filed by it under the Exchange Act. The Company has furnished the Purchaser with copies of (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2002, (ii) its quarterly report on From 10-Q for the period ended March 31, 2003, and (iii) its other filings including Forms 8-K and Definitive Proxy made in 2003 (collectively, the "SEC Reports"). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.22 LISTING. The Company's Common Stock is traded on the OTCBB and satisfies all requirements for the continuation of such trading . The Company has not received any notice that its Common Stock will be ineligible to trade on the OTCBB or that its Common Stock does not meet all requirements for such continued trading . 4.23 NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions. Nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be so integrated with other offerings. 4.24 STOP TRANSFER. The Securities are restricted securities as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by federal securities laws. 4.25 DILUTION. The Company specifically acknowledges that its obligation to issue the shares of Common Stock upon conversion of the Note and exercise of the Warrant is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. 4.26 PATRIOT ACT. The Company certifies that, to the best of Company's knowledge, neither the Company nor any of its Subsidiaries has been designated, nor is or shall be owned or controlled, by a "suspected terrorist" as defined in Executive Order 13224. The Company hereby acknowledges that the Purchaser seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, the Company hereby represents, warrants and covenants that: (i) none of the cash or property that the Company or any of its Subsidiaries will pay or will contribute to the Purchaser has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no contribution or payment by the Company or any of its Subsidiaries to the Purchaser, to the extent that they are within the Company's and/or its Subsidiaries' control shall cause the Purchaser to be in -11- violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall promptly notify the Purchaser if any of these representations, warranties or covenants ceases to be true and accurate regarding the Company or any of its Subsidiaries. The Company shall provide the Purchaser all additional information regarding the Company or any of its Subsidiaries that the Purchaser reasonably deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. The Company understands and agrees that if at any time it is discovered that any of the foregoing representations, warranties or covenants are incorrect, or if otherwise required by applicable law or regulation related to money laundering or similar activities, the Purchaser may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of the Purchaser's investment in the Company. The Company further understands that the Purchaser may release confidential information about the Company and its Subsidiaries and, if applicable, any underlying beneficial owners, to proper authorities if the Purchaser, in its reasonable discretion, determines that it is in the best interests of the Purchaser in light of relevant rules and regulations under the laws set forth in subsection (ii) above. 4.27 ERISA. Based upon the Employee Retirement Income Security Act of 1974 ("ERISA"), and the regulations and published interpretations thereunder: (i) neither the Company nor any of its Subsidiaries has engaged in any Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code")); (ii) each of the Company and each of its Subsidiaries has met all applicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii) neither the Company nor any of its Subsidiaries has any knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than the Company's or such Subsidiary's employees or former employees; and (v) neither the Company nor any of its Subsidiaries has withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 5.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All corporate action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by -12- applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies. 5.2 INVESTMENT REPRESENTATIONS. Purchaser understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement, including, without limitation, that the Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act. The Purchaser has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Note and the Warrant to be purchased by it under this Agreement and the Note Shares and the Warrant Shares acquired by it upon the conversion of the Note and the exercise of the Warrant, respectively. The Purchaser further has had an opportunity to ask questions and receive answers from the Company regarding the Company's business, management and financial affairs and the terms and conditions of the Offering, the Note, the Warrant and the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 5.3 PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk of this investment until the Securities are sold pursuant to (i) an effective registration statement under the Securities Act, or (ii) an exemption from registration is available. 5.4 ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Note and Warrant and the Note Shares and the Warrant Shares for Purchaser's own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution. 5.5 PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's, business and financial experience, Purchaser has the capacity to evaluate the merits and risks of its investment in the Note, the Warrant and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement, and the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Related Agreements. 5.6 ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. 5.7 LEGENDS. (a) The Note shall bear substantially the following legend: "THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, -13- OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NESTOR, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." (b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter defined), shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NESTOR, INC.THAT SUCH REGISTRATION IS NOT REQUIRED." (c) The Warrant shall bear substantially the following legend: "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NESTOR, INC.THAT SUCH REGISTRATION IS NOT REQUIRED." 5.8 NO SHORTING. The Purchaser or any of its affiliates and investment partners will not and will not cause any person or entity, directly or indirectly, to engage in "short sales" of the Company's Common Stock or any other hedging strategies. -14- 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Purchaser as follows: 6.1 STOP-ORDERS. The Company will advise the Purchaser, promptly after it receives notice of issuance by the Securities and Exchange Commission (the "SEC"), any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 6.2 LISTING. The Company shall promptly secure the trading of the shares of Common Stock issuable upon conversion of the Note and upon the exercise of the Warrant on the Pink Sheets, the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market, American Stock Exchange or New York Stock Exchange (the "Principal Market") upon which shares of Common Stock are then listed or traded (subject to official notice of issuance, if applicable) and shall maintain such listing or trading so long as any other shares of Common Stock shall be so listed or traded. The Company will maintain the listing (or trading) of its Common Stock on a Principal Market, and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.3 MARKET REGULATIONS. The Company shall notify the SEC, NASD and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Purchaser and promptly provide copies thereof to Purchaser. 6.4 REPORTING REQUIREMENTS. The Company will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. 6.5 USE OF FUNDS. The Company agrees that it will use the proceeds of the sale of the Note and Warrant to finance the construction, installation and maintenance of its traffic surveillance systems set forth on Schedule 6.5 attached hereto. 6.6 ACCESS TO FACILITIES. The Company will permit any representatives designated by the Purchaser (or any successor of the Purchaser), upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Company, to (a) visit and inspect any of the properties of the Company, (b) examine the corporate and financial records of the Company (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom and (c) discuss the affairs, finances and accounts of any such corporations with the directors, officers and independent accountants of the Company. Notwithstanding the foregoing, the Company will not provide any material, non-public information to the Purchaser unless the Purchaser signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws. -15- 6.7 TAXES. The Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. 6.8 INSURANCE. Each of the Company and its Subsidiaries will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as the Company and its Subsidiaries; and the Company and its Subsidiaries will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner which the Company reasonably believes is customary for companies in similar business similarly situated as the Company and its Subsidiaries and to the extent available on commercially reasonable terms. The Company, and each of its Subsidiaries, will jointly and severally bear the full risk of loss from any loss of any nature whatsoever with respect to the assets pledged to the Purchaser as security for their respective obligations hereunder and under the Related Agreements. At the Company's and each of its Subsidiaries' joint and several cost and expense in amounts and with carriers reasonably acceptable to the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep all its insurable properties and properties in which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to the Company's or the respective Subsidiary's including business interruption insurance; (ii) maintain a bond in such amounts as is customary in the case of companies engaged in businesses similar to the Company's or the respective Subsidiary's insuring against larceny, embezzlement or other criminal misappropriation of insured's officers and employees who may either singly or jointly with others at any time have access to the assets or funds of the Company or any of its Subsidiaries either directly or through governmental authority to draw upon such funds or to direct generally the disposition of such assets; (iii) maintain public and product liability insurance against claims for personal injury, death or property damage suffered by others; (iv) maintain all such worker's compensation or similar insurance as may be required under the laws of any state or jurisdiction in which the Company or the respective Subsidiary is engaged in business; and (v) furnish the Purchaser with (x) copies of all policies or evidence of the maintenance of such policies at least thirty (30) days before any expiration date, (y) excepting the Company's workers' compensation policy, endorsements to such policies naming the Purchaser as "co-insured" or "additional insured" and appropriate loss payable endorsements in form and substance satisfactory to the Purchaser, naming the Purchaser as loss payee, and (z) evidence that as to the Purchaser the insurance coverage shall not be impaired or invalidated by any act or neglect of the Company or any Subsidiary and the insurer will provide the Purchaser with at least thirty (30) days notice prior to cancellation. The Company and each Subsidiary shall instruct the insurance carriers that in the event of any loss thereunder, the carriers shall make payment for such loss to the Company and/or the Subsidiary and the Purchaser jointly. In the event that as of the date of receipt of each -16- loss recovery upon any such insurance, the Purchaser has not declared an event of default with respect to this Agreement or any of the Related Agreements, then the Company and/or such Subsidiary shall be permitted to direct the application of such loss recovery proceeds toward investment in property, plant and equipment that would comprise "Collateral" secured by the Purchaser's security interest pursuant to the Security Agreement or such other security agreement as shall be required by the Purchaser, with any surplus funds to be applied toward payment of the obligations of the Company to the Purchaser. In the event that the Purchaser has properly declared an event of default with respect to this Agreement or any of the Related Agreements, then all loss recoveries received by the Purchaser upon any such insurance thereafter may be applied to the obligations of the Company hereunder and under the Related Agreements, in such order as the Purchaser may determine. Any surplus (following satisfaction of all Company obligations to the Purchaser) shall be paid by the Purchaser to the Company or applied as may be otherwise required by law. Any deficiency thereon shall be paid by the Company or the Subsidiary, as applicable, to the Purchaser, on demand. 6.9 INTELLECTUAL PROPERTY. The Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. 6.10 PROPERTIES. The Company will keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could reasonably be expected to have a Material Adverse Effect. 6.11 CONFIDENTIALITY. The Company agrees that it will submit the text of any public announcement using the name of the Purchaser to the Purchaser prior to its dissemination, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Unless the Purchaser shall specify its objections in writing to the Company within 24 hours of its receipt of such public announcement, the Purchaser shall be deemed to have given its consent to the to the text of the public announcement. 6.12 REQUIRED APPROVALS. For so long as 50% of the principal amount of the Note is outstanding, the Company, without the prior written consent of the Purchaser, shall not: (a) directly or indirectly declare or pay any dividends; (b) liquidate, dissolve or effect a material reorganization; (c) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict the Company's right to perform the provisions of this Agreement or any of the agreements contemplated thereby; or (d) materially alter or change the scope of the business of the Company. -17- 6.13 Reissuance of Securities. The Company agrees to reissue certificates representing the Securities without the legends set forth in Section 5.7 above at such time as (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act, or (b) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act. The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested representations from the selling Purchaser and broker, if any. 6.14 OPINION. On the Closing Date, the Company will deliver to the Purchaser an opinion acceptable to the Purchaser from the Company's legal counsel. The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably necessary for the conversion of the Note and exercise of the Warrant. 6.15 INTENTIONALLY OMITTED. 6.16 MARGIN STOCK. The Company will not permit any of the proceeds of the Note or the Warrant to be used directly or indirectly to "purchase" or "carry" "margin stock" or to repay indebtedness incurred to "purchase" or "carry" "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. 6.17 NESTOR TRAFFIC SYSTEMS, INC. ASSIGNMENT OF CONTRACTS TO PURCHASER. Until the Obligations (as such term is defined in that certain Security Agreement dated as of the date hereof between Nestor Traffic Systems, Inc. ("NTSI"). and the Purchaser, the "Security Agreement") have been irrevocably paid and performed in full, subject only to Section 12.7 hereof, the Company shall direct and cause its wholly-owned subsidiary, NTSI to irrevocably assign all of its rights, title and interests in and to the proceeds of contracts set forth on Schedule 6.17 attached hereto (the "Assigned Contracts") to Purchaser. Each of the Company, NTSI shall use their respective best efforts to obtain such consent as provided in Section 12.7 hereof. Purchaser shall be reasonable and cooperate in obtaining any consent necessary to the collateral assignment of the Assigned Contracts to it. Until the Obligations have been irrevocably paid and performed in full, neither the Company nor NTSI shall relinquish any material rights under, terminate, or repudiate any of the Assigned Contracts without the prior written consent of Purchaser, which consent shall not be unreasonably withheld. 7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the Company as follows: 7.1 CONFIDENTIALITY. The Purchaser agrees that it will not disclose, and will not include in any public announcement, the name of the Company, unless expressly agreed to by the Company or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. -18- 7.2 NON-PUBLIC INFORMATION. The Purchaser agrees not to effect any sales in the shares of the Company's Common Stock while in possession of material, non-public information regarding the Company. 8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION. 8.1 COMPANY INDEMNIFICATION. The Company agrees to indemnify, hold harmless, reimburse and defend Purchaser, each of Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser which results, arises out of or is based upon (i) any misrepresentation by Company or breach of any warranty by Company in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement, or (ii) any breach or default in performance by Company of any covenant or undertaking to be performed by Company hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 8.2 PURCHASER'S INDEMNIFICATION. Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon (i) any misrepresentation by Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 8.3 PROCEDURES. The procedures and limitations set forth in Section 10.2 shall apply to the indemnifications set forth in Sections 8.1 and 8.2 above. -19- 9. CONVERSION OF CONVERTIBLE NOTE. 9.1 MECHANICS OF CONVERSION. (a) Provided the Purchaser has notified the Company of the Purchaser's intention to sell the Note Shares and the Note Shares are included in an effective registration statement or are otherwise exempt from registration when sold: (i) Upon the conversion of the Note or part thereof, the Company shall, at its own cost and expense, take all necessary action (including the issuance of an opinion of counsel) to assure that the Company's transfer agent shall issue shares of the Company's Common Stock in the name of the Purchaser (or its nominee) or such other persons as designated by the Purchaser in accordance with Section 9.1(b) hereof and in such denominations to be specified representing the number of Note Shares issuable upon such conversion; and (ii) The Company warrants that no instructions other than these instructions have been or will be given to the transfer agent of the Company's Common Stock and that after the Effective Date (as hereinafter defined) the Note Shares issued will be freely transferable subject to the prospectus delivery requirements of the Securities Act and the provisions of this Agreement, and will not contain a legend restricting the resale or transferability of the Note Shares. (b) Purchaser will give notice of its decision to exercise its right to convert the Note or part thereof by telecopying or otherwise delivering an executed and completed notice of the number of shares to be converted to the Company (the "Notice of Conversion"). The Purchaser will not be required to surrender the Note until the Purchaser receives a credit to the account of the Purchaser's prime broker through the DWAC system (as defined below), representing the Note Shares or until the Note has been fully satisfied. Each date on which a Notice of Conversion is telecopied or delivered to the Company in accordance with the provisions hereof shall be deemed a "Conversion Date." The Company will cause the transfer agent to transmit the shares of the Company's Common Stock issuable upon conversion of the Note (and a certificate representing the balance of the Note not so converted, if requested by Purchaser) to the Purchaser by crediting the account of the Purchaser's prime broker with the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system, if available to the Company's transfer agent, within three (3) business days after receipt by the Company of the Notice of Conversion (the "Delivery Date"). The Company understands that a delay in the delivery of the Note Shares in the form required pursuant to Section 9 hereof beyond the Delivery Date could result in economic loss to the Purchaser. In the event that the Company fails to direct its transfer agent to deliver the Note Shares to the Purchaser via the DWAC system within the time frame set forth in Section 9.1(b) above and the Note Shares are not delivered to the Purchaser by the Delivery Date, as compensation to the Purchaser for such loss, the Company agrees to pay late payments to the Purchaser for late issuance of the Note Shares in the form required pursuant to Section 9 hereof upon conversion of the Note in the amount equal to the greater of (i) $500 per business day after the Delivery Date or (ii) the Purchaser's actual damages from such delayed delivery. Notwithstanding the foregoing, the Company will not owe the Purchaser any late payments if the delay in the delivery of the Note Shares beyond the Delivery Date is out of the control of the Company and the Company is actively trying to cure the cause of the delay. The Company shall pay any payments incurred under this Section in immediately available funds upon demand and, in the case of actual damages, -20- accompanied by reasonable documentation of the amount of such damages. Such documentation shall show the number of shares of Common Stock the Purchaser is forced to purchase (in an open market transaction) which the Purchaser anticipated receiving upon such conversion, and shall be calculated as the amount by which (A) the Purchaser's total purchase price (including customary brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate principal and/or interest amount of the Note, for which such Conversion Notice was not timely honored. Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum amount permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to a Purchaser and thus refunded to the Company. 9.2 MAXIMUM CONVERSION. The Purchaser shall not be entitled to convert on a Conversion Date, nor shall the Company be permitted to require the Purchaser to accept, that amount of a Note in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Purchaser on a Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Note with respect to which the determination of this proviso is being made on a Conversion Date, which would result in beneficial ownership by the Purchaser of more than 4.99% of the outstanding shares of Common Stock of the Company on such Conversion Date. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. Upon an Event of Default under the Note, the conversion limitation in this Section 9.2 shall become null and void. 10. REGISTRATION RIGHTS. 10.1 REGISTRATION RIGHTS GRANTED. The Company hereby grants registration rights to the Purchaser pursuant to a Registration Rights Agreement dated as of even date herewith between the Company and the Purchaser. 10.2 INDEMNIFICATION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to the Registration Rights Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to the Registration Rights Agreement, any preliminary prospectus or final prospectus contained -21- therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by the Purchaser or any such person in writing specifically for use in any such document. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to the Registration Rights Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to the Registration Rights Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by the Purchaser specifically for use in any such document. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 10.2(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 10.2(c) if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 10.2(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof; if the indemnified party retains its own counsel, then the indemnified party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded -22- that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 10.2 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 10.2 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 10.2; then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10 of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 11. OFFERING RESTRICTIONS. Except as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock options granted to employees or directors of the Company; or equity or debt issued in connection with an acquisition of a business or assets by the Company; or the issuance by the Company of stock in connection with the establishment of a joint venture partnership or licensing arrangement (these exceptions hereinafter referred to as the "Excepted Issuances"), the Company will not issue any securities with a continuously variable/floating conversion feature which are or could be (by conversion or registration) free-trading securities (i.e. common stock subject to a registration statement) prior to the full repayment or conversion of the Note (the "Exclusion Period"). 12. COLLATERAL. 12.1 Each of the Company and NTSI, as applicable, will direct all present and future Account Debtors of NTSI set forth on Schedule 6.17 hereof, and other persons obligated to make payments constituting Accounts of Assigned Contracts to make such payments directly to the lockbox maintained by the Company (the "Lockbox") with North Fork Bank pursuant to the terms of the Lockbox Agreement dated May 16, 2005 or such other financial institution -23- accepted by the Purchaser in writing as may be selected by the Company (the "Lockbox Bank"). On or prior to the Closing Date, the Company and NTSI, as applicable, shall and shall cause the Lockbox Bank to enter into all such documentation acceptable to the Purchaser pursuant to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and deposit all checks received therein to an account designated by the Company in writing and (b) comply only with the instructions or other directions of the Purchaser concerning the Lockbox. All of the NTSI's invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account of any Assigned Contract shall conspicuously direct that all payments be made to the Lockbox. Within thirty (30) days of closing, the Company shall provide copies of all invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account relating to any Assigned Contract each clearly directing Account Debtors to make all payments to the Lockbox. If, notwithstanding the instructions to Account Debtors, the Company and or NTSI, as applicable receives any payments, the Company and or NTSI, as applicable, shall immediately remit such payments to the Lockbox in their original form with all necessary endorsements. Until so remitted, the Company and or NTSI, as applicable shall hold all such payments in trust for and as the property of the Purchaser and shall not commingle such payments with any of its other funds or property. 12.2 At the Purchaser's election, (i) if an Event of Default set forth in Sections 4.2 or 4.3 of the Note has occurred and is continuing for thirty (30) days or (ii) if an Event of Default specified in Sections 4.1, 4.4, 4.5, 4.7 or 4.9 of the Note has occurred and is continuing beyond any applicable grace period, the Purchaser may notify Account Debtors of any Assigned Contract of the Purchaser's security interest in the Accounts, collect them directly and charge the collection costs and expenses thereof to the Company's account. 12.3 The Purchaser hereby agrees that if no Event of Default under the Note has occurred and is continuing then all funds contained in the Lockbox will be transferred daily to such account as shall be designated by the Company pursuant to that certain letter agreement dated as of May 16, 2005 among the Company, NTSI, Purchaser and North Fork Bank. Upon an Event of Default that has occurred and is continuing beyond any applicable grace period, the Purchaser may deliver written instructions to the Lockbox Bank stating that an Event of Default has occurred and is continuing and directing the Lockbox Bank to immediately cease wiring funds to accounts designated by the Company and instead direct the Lockbox Bank to wire all such funds into an account designated by the Purchaser. 12.4 Upon the occurrence and during the continuance of an Event of Default (as defined in the Note or the NTSI Security Agreement), the Company hereby appoints the Purchaser, or any other person whom the Purchaser may designate as the Company's attorney, with power to: (i) endorse the Company's or NTSI's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security related to the Assigned Contracts that may come into the Purchaser's possession; (ii) sign the Company's or NTSI.'s name on any invoice or bill of lading relating to any Accounts, drafts against Account Debtors, schedules and assignments of Accounts, notices of assignment, financing statements and other public records, verifications of Account and notices to or from Account Debtors; (iii) verify the validity, amount or any other matter relating to any Account by mail, telephone, telegraph or otherwise with Account Debtors; (iv) do all things necessary to carry out this Agreement, any Related -24- Agreement and all related documents; and (v) on or after the occurrence and continuation of an Event of Default, notify the post office authorities to change the address for delivery of the Company's mail to an address designated by the Purchaser, and to receive, open and dispose of all mail addressed to the Company or NTSI . The Company and NTSI hereby ratifies and approves all acts of the attorney. Neither the Purchaser, nor the attorney will be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as the Purchaser has a security interest and until all obligations from the Company to the Purchaser have been fully satisfied. Notwithstanding the immediately foregoing, the Purchaser shall not exercise any powers granted to it pursuant to this Section 12.4 unless and until an Event of Default under the Note shall have occurred and be continuing. 12.5 All terms used in this Agreement and defined in the Uniform Commercial Code ("UCC"), shall have the meaning given therein unless otherwise defined herein. The terms below shall be defined as follows: (a) Account Debtor" means any person who is or may be obligated with respect to, or on account of, an Account of any Assigned Contract . (b) "Accounts" means all "accounts", as such term is defined in the UCC, now owned or hereafter acquired by NTSI constituting Collateral (as defined in the NTSI Security Agreement. 12.6 Delivery of Additional Collateral. The Company hereby agrees that it shall execute and deliver, and it shall cause NTSI. to execute and deliver, as an assignment for security, all documents, including but not limited to assignment of claims agreements, which Purchaser shall reasonably request in respect of any Assigned Contract. 12.7 Assignment of Proceeds of Assigned Contracts; Consent to Assignment . (a) Each of the Company and NTSI hereby jointly and severally represents and warrants to Purchaser that all action necessary and advisable to effect a valid, binding and enforceable security interest in all of the proceeds of each of the Assigned Contracts identified by numbers 1,4,5,6,9,10,11,13,14,15 and 16 (as numbered and set forth on Schedule 6.17 hereto)have been taken and further that such valid assignments are sufficient to enable the Purchaser to realize the practical benefits under this Agreement, the Related Agreements and all applicable law. Notwithstanding the immediately foregoing sentence, NTSI shall obtain and deliver a consent to assignment, substantially in the form attached hereto as Exhibit A, for at least 75% of the Assigned Contracts identified by numbers 1,4,5,6,9,10,11,13,14,15 and 16(as numbered and set forth on Schedule 6.17 hereto), within forty five (45) days of the date hereof; (b) Each of the Company and NTSI hereby jointly and severally covenants to Purchaser that all action necessary and advisable to effect a -25- valid, binding and enforceable security interest in all of the proceeds of each of the Assigned Contracts which may be assigned to the Purchaser on the date hereof only with the additional consent of the municipal entities party to the Assigned Contracts (Assigned Contracts identified by numbers 3,7,8,and 12(as numbered and set forth on Schedule 6.17 hereto),such assignments shall be made promptly upon obtaining consent to such assignment, substantially in the form attached hereto as Exhibit A, 75% of which such consents shall be obtained and delivered to Purchaser within forty five (45) days of the date hereof, and further that such valid assignments and consents shall be sufficient to enable the Purchaser to realize the practical benefits under this Agreement, the Related Agreements and all applicable law. (c) Each of the Company and NTSI hereby jointly and severally covenants to Purchaser that all action necessary and advisable to effect a valid, binding and enforceable security interest in the proceeds of each of the Assigned Contracts which may be assigned to the Purchaser upon their execution and delivery by and to each of the parties thereto (Assigned Contracts identified by numbers 17,18,19 and 20)(as numbered and set forth on Schedule 6.17 hereto), will be taken at the time of their execution and delivery by the parties thereto, such assignments shall be made promptly upon obtaining consent to such assignment (75% of which such consents shall be obtained and delivered to Purchaser within one hundred eighty (180) days of the date hereof, and further that such valid assignments shall be sufficient to enable the Purchaser to realize the practical benefits under this Agreement, the Related Agreements and all applicable law. (d) Each of the Company and NTSI hereby jointly and severally represents and warrants to Purchaser that all action necessary and advisable to effect a valid, binding and enforceable security interest in all of the proceeds of the Assigned Contracts identified by number 2 (as numbered and set forth on Schedule 6.17 hereto)have been taken and further that such valid assignments are sufficient to enable the Purchaser to realize the practical benefits under this Agreement, the Related Agreements and all applicable law. (e) Notwithstanding the immediately foregoing Sections 12.7(a), (b) and (c) above, failure to receive valid, binding and enforceable consents to assignment of the number of Assigned Contract as required therein shall not be deemed to be a breach hereunder to the extent that NTSI shall validly pledge, assign and substitute for the Assigned Contracts for which no valid consent is obtained and delivered as required therein, contracts substantially similar in type and tenor for which consent to assignment of proceeds has been obtained and delivered to Purchaser, if such substitution contracts are otherwise acceptable to Laurus in the exercise of its reasonable discretion. -26- 13. MISCELLANEOUS. 13.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. Both parties and the individuals executing this Agreement and other agreements on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. 13.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 13.3 SUCCESSORS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time. 13.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, the Related Agreements and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 13.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 13.6 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the Purchaser under this Agreement may be waived only with the written consent of the Purchaser. (c) The obligations of the Purchaser and the rights of the Company under this Agreement may be waived only with the written consent of the Company. -27- 13.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement, the Note or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 13.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by telephonically confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof, to the Purchaser at the address set forth on the signature page hereto for such Purchaser, with a copy in the case of the Company to Benjamin M. Alexander, Esq., and in the case of Purchaser to John E. Tucker , Esq., 825 3th Street, 14th Floor, New York, NY 10022, facsimile number (212) 541-4434, or at such other address as the Company or the Purchaser may designate by ten days advance written notice to the other parties hereto. 13.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 13.10 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 13.11 FACSIMILE SIGNATURES; COUNTERPARTS. This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 13.12 BROKER'S FEES. The Company represents and warrants that, any agent, broker, investment banker, person or firm acting on behalf of or under the authority of the Company is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein will be paid by the Company. The Company further agrees to indemnify the Purchaser for any claims, losses or expenses incurred by it as a result of the representation in this Section 13.12 being untrue. Purchaser represents and warrants that, no agent, broker, investment banker, person or firm acting on behalf of or under the authority of Purchaser is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein, except the Closing Payment. Purchaser further agrees to indemnify each other -28- party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 13.12 being untrue 13.13 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. -29- IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: NESTOR, INC. LAURUS MASTER FUND, LTD. By: /s/ Nigel P. Hebborn By: /s/David Grin ------------------------------ ------------------------------ Name: Nigel P. Hebborn Name: David Grin Title: Executive Vice President Title: Partner Address: Nestor, Inc. Address: c/o Ironshore Corporate Services Ltd. 400 Massasoit Avenue Suite 200 P.O. Box 1234 G.T., Queensgate House, East Providence, RI 02914 South Church Street Attention: William B. Danzell Grand Cayman, Cayman Islands SOLELY WITH RESPECT TO SECTIONS 6.17 AND 12 HEREOF: NESTOR, TRAFFIC SYSTEMS, INC. By: /s/ Nigel P. Hebborn ------------------------------ Name: Nigel P. Hebborn Title: Executive Vice President -30- Schedule 4.1 Related Agreements 1. The Securities Purchase Agreement dated as of May 16, 2005 between Purchaser and the Company and NTSI (as amended, modified and/or supplemented from time to time); 2. the Convertible Note in the original principal amount of $6,000,000 dated as of May 16, 2005 issued to the Purchaser by the Company (as amended, modified and/or supplemented from time to time); 3. the Warrant to dated as of May 16, 2005 issued to Purchaser to purchase up to 100,000 shares of the common stock of the Company (as amended, modified and/or supplemented from time to time); 4. the Security Agreement dated as of the date hereof among the Nestor Traffic Systems, Inc. ("NTSI"), and the Purchaser (as amended, modified and/or supplemented from time to time, the "NTSI Security Agreement") 5. the Pledge and Security Agreement dated as of the date hereof between the NTSI and the Purchaser (as amended, modified and/or supplemented from time to time, the "NTSI Pledge Agreement") 6. the Registration Rights Agreement relating to the Securities dated as of the date hereof between the Company and the Purchaser (as amended, modified and/or supplemented from time to time, the "Registration Rights Agreement"), 7. the Subsidiary Guaranty dated as of the date hereof made by NTSI (as amended, modified and/or supplemented from time to time, the "Subsidiary Guaranty"), 8. the Funds Escrow Agreement dated as of the date hereof among the Company, the Purchaser and the escrow agent referred to therein, substantially in the form of Exhibit D hereto (as amended, modified and/or supplemented from time to time, the "Escrow Agreement") and all other documents, instruments and agreements entered into in connection with the transactions contemplated hereby and thereby (the preceding items 2 through 8 above, collectively, the "Related Agreements"). -31- SCHEDULE 4.2 SUBSIDIARIES Nestor, Inc. subsidiaries: Nestor Traffic Systems, Inc. Formed 1/1/97 in Delaware as Nestor IS, Inc.. 100% owned by Nestor, Inc. Nestor Interactive, Inc. Formed 1/1/97 in Delaware. 100% owned by Nestor, Inc. Nestor Traffic Systems, Inc. subsidiaries: CrossingGuard, Inc. Formed 7/21/03 in Delaware. 100% owned by Nestor Traffic Systems, Inc. SCHEDULE 4.3 CAPITALIZATION Share Rights (including anti-dilution protections):
WARRANTS - -------- EXERCISE EXPIRATION HOLDER HOLDER PRICE DATE SHARES - ------ -------- ---------- ------ NTS Investors LLC $4.80 1/25/2006 18,331 Sage Investments, Inc. 1.94 7/31/2008 1,320 Sage Investments, Inc. 2.25 7/31/2008 960 Sanders Morris Harris Group 5.21 10/31/2009 60,000 ---------- 80,611 ========== NTS Investors LLC - contingent warrant right 1/25/2006 18,331 ========== CONVERSION MATURITY PRINCIPAL HOLDER CONVERTIBLE NOTES PRICE DATE OUTSTANDING SHARES - ----------------- ---------- -------- ----------- ------ Senior Convertible Notes dated 11/5/04 $5.82 10/31/2007 $5,200,000 893,471 ==========
SCHEDULE 4.5 LIABILITIES Material Contingent Liabilities: None, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings. SCHEDULE 4.6 AGREEMENTS: ACTION The Company is engaged in settlement discussions with Transol USA, Inc. and Transol, Inc. (collectively, "Transol") regarding ongoing patent litigation which include discussions of licensing certain patent rights of the Company to Transol USA, Inc. and Transol, Inc. SCHEDULE 4.7 OBLIGATIONS TO RELATED PARTIES See Definitive Proxy dated May 2, 2005 for equity holdings of Directors and Officers, along with related party disclosures, and employment agreement. SCHEDULE 4.9 TITLE TO PROPERTIES AND ASSETS: LIENS, ETC. Assets are subject to various leases obtained in the normal course of business. Lease compliance: No exceptions. SCHEDULE 4.10(b) INTELLECTUAL PROPERTY None SCHEDULE 4.11 COMPLIANCE WITH OTHER INSTRUMENTS None. SCHEDULE 4.12 LITIGATION See "Legal Proceedings" in Exchange Act Filings. SCHEDULE 4.13 TAX RETURNS AND PAYMENTS Nestor, Inc. received a corporate franchise tax assessment from the State of Rhode Island for fiscal 2002 in the amount of $190,000 based upon the number of outstanding shares of stock of the company at the end of 2001. During 2001, the company reorganized with Nestor, Inc. becoming an inactive holding company and NTS assuming operating activities. As such, Nestor was not active in Rhode Island in 2002. The company does not believe it is subject to this capital account tax for the respective period and is disputing the assessment. SCHEDULE 4.14 EMPLOYEES None. SCHEDULE 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS None. SCHEDULE 4.16 COMPLIANCE WITH LAWS; PERMITS None. SCHEDULE 6.5 USE OF FUNDS The systems to be supplied pursuant to the Assigned Contracts identified in Schedule 6.17. SCHEDULE 6.17 ASSIGNED CONTRACTS The items identified as Items 17,18,19 and 20 in the following table have not yet been entered into.
Locale Agreement Assignability ------ --------- ------------- 1. Alpharetta, GA Traffic Signal Violation Video-Enforcement System No restriction on assignment for & Lease Agreement between NTSI and City of financing Alpharetta, GA dated __ November 2004 2. Baltimore, MD Definitive Subcontract Agreement between ACS State Assignment of monies due permitted & Local Solutions, Inc. ("ACS") and NTSI dated 13 any other assignment requires consent April 2004 of ACS, not to be unreasonably withheld 3. Cerritos, CA Automated Traffic Signal Enforcement and Citation Assignment for financing permitted Processing Pilot Program for the City of Cerritos but conditioned upon assignee's between City of Cerritos, CA and NTSI dated 11 execution of documents reasonably July 2002, amended by Addendum 1 (11 September required by City 2003) 4. Costa Mesa, CA Traffic Signal Violation Video-Monitoring System No restriction on assignment for Services Agreement between NTSI and City of Costa financing Mesa, CA dated 15 July 2002, amended by Addendum 1 (30 April 2003) and Addendum 2 (31 July 2003) 5. Chatham County, GA Traffic Signal Violation Video-Enforcement System No restriction on assignment for Lease & Services Agreement between NTSI and the financing Savannah Economic Development Authority dated 21 October 2004 6. Falls Church, VA Traffic Signal Violation Photo-Monitoring System No restriction on assignment for Agreement between NTSI and City of Falls Church, financing VA dated16 December 1999 amended by Addendum 1 (11 February 2003), Addendum 2 (5 September 2003), Addendum 3 (8 October 2003), Addendum 4 (2 March 2004) and Addendum 5 (12 May 2005) 7. Frederick, MD Agreement for Services between City of Frederick, Assignment requires consent of City MD and NTSI dated 16 December 2004 amended by First Amendment to Agreement for Services (16 December 2004) 8. Fresno, CA Contract: Red Traffic Light Enforcement Program Assignment requires consent of City Proposal No. 8262 between City of Fresno, CA and NTSI dated 16 November 2000 amended by First Amendment to Contract (16 November 2000) 9. Fullerton, CA Traffic Signal Violation Video-Monitoring Systems No restriction on assignment for Services Agreement between NTSI and City of financing Fullerton, CA dated 19 June 2002 amended by Addendum 1 (31 March 2003) and Addendum 2 (31 December 2003) Locale Agreement Assignability ------ --------- ------------- 10. Germantown, TN Traffic Signal Violation Video-Monitoring System No restriction on assignment for Services Agreement between NTSI and City of financing Germantown, TN dated __ October 2001 11. Irvine, CA Traffic Signal Violation Video-Monitoring System No restriction on assignment for Services Agreement between NTSI and City of financing Irvine, CA dated 11 December 2001 12. Long Beach, CA Agreement between NTSI and City of Long Beach, CA Assignment of monies due permitted; dated 1 December 2004 any other assignment requires consent of City, not to be unreasonably withheld 13. Montclair, CA Traffic Signal Violation Video-Monitoring System No restriction on assignment for Agreement between NTSI and Municipality of financing Montclair, CA dated 4 September 2001 14. Pasadena, CA Traffic Signal Violation Video-Monitoring System No restriction on assignment for Services Agreement No. 17,712 between NTSI and financing City of Pasadena, CA dated 24 June 2002 15. Rancho Cucamonga, CA Traffic Signal Violation Photo-Monitoring System No restriction on assignment for CA Agreement between NTSI and City of Rancho financing Cucamonga, CA dated 7 March 2001 amended by Addendum 1 (19 March 2003) 16. Vienna, VA Traffic Signal Violation Video-Monitoring System No restriction on assignment for Services Agreement between NTSI and Town of financing Vienna, VA dated 31 October 2002 17. Davis, CA Any contract subsequently entered into; currently, n/a no contract exists 18. Los Angeles, CA Any contract subsequently entered into; currently, n/a no contract exists 19. New Bern, NC Any contract subsequently entered into; currently, n/a no contract exists 20. San Bernadino, CA Any contract subsequently entered into; currently, n/a no contract exists
LIST OF EXHIBITS Form of Consent Exhibit A EXHIBIT A FORM OF CONSENT May __, 2005 [Name] [Address] Re: Notice and Acknowledgment Reference is made to the ________________ Agreement dated _____________ (as amended, restated, supplemented and modified from time to time, the "Agreement") by and between [Company] ("Company") and [City] ("City") pursuant to which Company generates accounts receivable (the "Receivables"). Company hereby gives notice to City that Company has granted a security interest to Laurus Master Fund, Ltd. ("Laurus") in all of the Receivables now existing and hereafter arising under the Agreement (the "Security Interest"). All payments owing by City to Company are to be made [directly to Laurus at the following address]: --------------------------------------------- --------------------------------------------- --------------------------------------------- City hereby acknowledges and consents to the grant of the Security Interest and agrees that: (a) the Agreement is in full force and effect and the grant of Security Interest does not constitute a breach thereof, (b) no default exists on the part of the Company in the performance of its obligations under the Agreement; (c) the payment direction set forth herein may only be modified with the prior written consent of Laurus, and (d) it will not assert any right of offset against any Receivables owing to the Company for any claims it may have against the Company. Very truly yours, [COMPANY] By: ------------------------------- Title: AGREED TO AND ACCEPTED: [CITY] By: ----------------------------- Name: Title: -A-1- EX-10 6 ex10_46subguaranty.txt SUBSIDIARY GUARANTY EXHIBIT 10.46 ------------- SUBSIDIARY GUARANTY New York, New York May 16, 2005 FOR VALUE RECEIVED, and in consideration of note purchases from, loans made or to be made or credit otherwise extended or to be extended by Laurus Master Fund, Ltd. ("Laurus") to or for the account of Nestor, Inc., (parent corporation of Nestor Traffic Systems, Inc., the parent corporation of the undersigned) ("Debtor") from time to time and at any time and for other good and valuable consideration and to induce Laurus, in its discretion, to purchase such notes, make such loans or extensions of credit and to make or grant such renewals, extensions, releases of collateral or relinquishments of legal rights as Laurus may deem advisable, the undersigned (and each of them if more than one, the liability under this Guaranty being joint and several) (jointly and severally referred to as "Guarantor" or "the undersigned") unconditionally guaranties to Laurus, its successors, endorsees and assigns the prompt payment when due (whether by acceleration or otherwise) of all present and future obligations and liabilities of any and all kinds of Debtor to Laurus and of all instruments of any nature evidencing or relating to any such obligations and liabilities upon which Debtor or one or more parties and Debtor is or may become liable to Laurus, whether incurred by Debtor as maker, endorser, drawer, acceptor, guarantor, accommodation party or otherwise, and whether due or to become due, secured or unsecured, absolute or contingent, joint or several, and however or whenever acquired by Laurus, whether arising under, out of, or in connection with the Securities Purchase Agreement dated as of the date hereof betweenDebtor and Laurus (as the same may be amended, modified and supplemented from time to time, the "Purchase Agreement"), the Related Agreements referred to in the Purchase Agreement, including , without limitation, by Debtor to you whether under the Convertible Note dated as of the date hereof made by Debtor in favor of Laurus in the original principal amount of $6,000,000, (as the same may be amended, modified and supplemented from time to time (the "Note") and any documents, instruments or agreements relating to or executed in connection with the Note or any documents, instruments or agreements referred to therein (together with the Note, as each may be amended, modified, restated or supplemented from time to time, the "Documents"), or otherwise (all of which are herein collectively referred to as the "Obligations"), and irrespective of the genuineness, validity, regularity or enforceability of such Obligations, or of any instrument evidencing any of the Obligations or of any collateral therefor or of the existence or extent of such collateral, and irrespective of the allowability, allowance or disallowance of any or all of the Obligations in any case commenced by or against Debtor under Title 11, United States Code, including, without limitation, obligations or indebtedness of Debtor for post-petition interest, fees, costs and charges that would have accrued or been added to the Obligations but for the commencement of such case. In furtherance of the foregoing, the undersigned hereby agrees as follows: 1. NO IMPAIRMENT. Laurus may at any time and from time to time, either before or after the maturity thereof, without notice to or further consent of the undersigned, extend the time of payment of, exchange or surrender any collateral for, renew or extend any of the Obligations or increase or decrease the interest rate thereon, and may also make any agreement with Debtor or with any other party to or person liable on any of the Obligations, or interested therein, for the extension, renewal, payment, compromise, discharge or release thereof, in whole or in part, or for any modification of the terms thereof or of any agreement between Laurus and Debtor or any such other party or person, or make any election of rights Laurus may deem desirable under the United States Bankruptcy Code, as amended, or any other federal or state bankruptcy, reorganization, moratorium or insolvency law relating to or affecting the enforcement of creditors' rights generally (any of the foregoing, an "Insolvency Law") without in any way impairing or affecting this Guaranty. This instrument shall be effective regardless of the subsequent incorporation, merger or consolidation of Debtor, or any change in the composition, nature, personnel or location of Debtor and shall extend to any successor entity to Debtor, including a debtor in possession or the like under any Insolvency Law. 2. GUARANTY ABSOLUTE. The undersigned guarantees that the Obligations will be paid strictly in accordance with the terms of the Note and/or any other document, instrument or agreement creating or evidencing the Obligations, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Debtor with respect thereto. Guarantor hereby knowingly accepts the full range of risk encompassed within a contract of "continuing guaranty" which risk includes the possibility that Debtor will contract additional indebtedness for which Guarantor may be liable hereunder after Debtor's financial condition or ability to pay its lawful debts when they fall due has deteriorated, whether or not Debtor has properly authorized incurring such additional indebtedness. The undersigned acknowledges that (i) no oral representations, including any representations to extend credit or provide other financial accommodations to Debtor, have been made by Laurus to induce the undersigned to enter into this Guaranty and (ii) any extension of credit to the Debtor shall be governed solely by the provisions of the Documents. The liability of the undersigned under this Guaranty shall be absolute and unconditional, in accordance with its terms, and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (a) any waiver, indulgence, renewal, extension, amendment or modification of or addition, consent or supplement to or deletion from or any other action or inaction under or in respect of the Documents or any other instruments or agreements relating to the Obligations or any assignment or transfer of any thereof, (b) any lack of validity or enforceability of any Loan Document or other documents, instruments or agreements relating to the Obligations or any assignment or transfer of any thereof, (c) any furnishing of any additional security to Laurus or its assignees or any acceptance thereof or any release of any security by Laurus or its assignees, (d) any limitation on any party's liability or obligation under the Documents or any other documents, instruments or agreements relating to the Obligations or any assignment or transfer of any thereof or any invalidity or unenforceability, in whole or in part, of any such document, instrument or agreement or any term thereof, (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to Debtor, or any action taken with respect to this Guaranty by any trustee or receiver, or by any court, in any such proceeding, whether or not the undersigned shall have notice or knowledge of any of the foregoing, (f) any exchange, release or nonperfection of any collateral, or any release, or amendment or waiver of or consent to departure from any guaranty or security, for all or any of the Obligations or (g) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the undersigned. Any amounts due from the undersigned to Laurus shall bear interest until such amounts are paid in full at the highest rate then applicable to the Obligations. 3. WAIVERS. (a) This Guaranty is a guaranty of payment and not of collection. Laurus shall be under no obligation to institute suit, exercise rights or remedies or take any other action against Debtor or any other person liable with respect to any of the Obligations or resort to any collateral security held by it to secure any of the Obligations as a condition precedent to the undersigned being obligated to perform as agreed herein and Guarantor hereby -2- waives any and all rights which it may have by statute or otherwise which would require Laurus to do any of the foregoing. Guarantor further consents and agrees that Laurus shall be under no obligation to marshal any assets in favor of Guarantor, or against or in payment of any or all of the Obligations. The undersigned hereby waives all suretyship defenses and any rights to interpose any defense, counterclaim or offset of any nature and description which the undersigned may have or which may exist between and among Laurus, Debtor and/or the undersigned with respect to the undersigned's obligations under this Guaranty, or which Debtor may assert on the underlying debt, including but not limited to failure of consideration, breach of warranty, fraud, payment (other than cash payment in full of the Obligations), statute of frauds, bankruptcy, infancy, statute of limitations, accord and satisfaction, and usury. (b) The undersigned further waives (i) notice of the acceptance of this Guaranty, of the making of any such loans or extensions of credit, and of all notices and demands of any kind to which the undersigned may be entitled, including, without limitation, notice of adverse change in Debtor's financial condition or of any other fact which might materially increase the risk of the undersigned and (ii) presentment to or demand of payment from anyone whomsoever liable upon any of the Obligations, protest, notices of presentment, non-payment or protest and notice of any sale of collateral security or any default of any sort. (c) Notwithstanding any payment or payments made by the undersigned hereunder, or any setoff or application of funds of the undersigned by Laurus, the undersigned shall not be entitled to be subrogated to any of the rights of Laurus against Debtor or against any collateral or guarantee or right of offset held by Laurus for the payment of the Obligations, nor shall the undersigned seek or be entitled to seek any contribution or reimbursement from Debtor in respect of payments made by the undersigned hereunder, until all amounts owing to Laurus by Debtor on account of the Obligations are paid in full and the Documents have been terminated. If, notwithstanding the foregoing, any amount shall be paid to the undersigned on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full and the Documents shall not have been terminated, such amount shall be held by the undersigned in trust for Laurus, segregated from other funds of the undersigned, and shall forthwith upon, and in any event within two (2) business days of, receipt by the undersigned, be turned over to Laurus in the exact form received by the undersigned (duly endorsed by the undersigned to Laurus, if required), to be applied against the Obligations, whether matured or unmatured, in such order as Laurus may determine, subject to the provisions of the Documents. Any and all present and future debts and obligations of Debtor to any of the undersigned are hereby waived and postponed in favor of, and subordinated to the full payment and performance of, all present and future debts and obligations of Debtor to Laurus. 4. SECURITY. All sums at any time to the credit of the undersigned and any property of the undersigned in Laurus's possession or in the possession of any bank, financial institution or other entity that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, Laurus (each such entity, an "Affiliate") shall be deemed held by Laurus or such Affiliate, as the case may be, as security for any and all of the undersigned's obligations to Laurus and to any Affiliate of Laurus, no matter how or when arising and whether under this or any other instrument, agreement or otherwise. 5. REPRESENTATIONS AND WARRANTIES. The undersigned hereby represents and warrants (all of which representations and warranties shall survive until all Obligations are indefeasibly satisfied in full and the Documents have been irrevocably terminated), that: -3- (a) CORPORATE STATUS. The undersigned is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power, authority and legal right to own its property and assets and to transact the business in which it is engaged. (b) AUTHORITY AND EXECUTION. The undersigned has full power, authority and legal right to execute and deliver, and to perform its obligations under, this Guaranty and has taken all necessary corporate and legal action to authorize the execution, delivery and performance of this Guaranty. (c) LEGAL, VALID AND BINDING CHARACTER. This Guaranty constitutes the valid and binding obligation of the undersigned enforceable in accordance with its terms, except as enforceability may be limited by applicable Insolvency Law. (d) VIOLATIONS. The execution, delivery and performance of this Guaranty will not violate any requirement of law applicable to the undersigned or any material contract, agreement or instrument to which the undersigned is a party or by which the undersigned or any property of the undersigned is bound or result in the creation or imposition of any mortgage, lien or other encumbrance other than to Laurus on any of the property or assets of the undersigned pursuant to the provisions of any of the foregoing. (e) CONSENTS OR APPROVALS. No consent of any other person or entity (including, without limitation, any creditor of the undersigned) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery, performance, validity or enforceability of this Guaranty. (f) LITIGATION. No litigation, arbitration, investigation or administrative proceeding of or before any court, arbitrator or governmental authority, bureau or agency is currently pending or, to the best knowledge of the undersigned, threatened (i) with respect to this Guaranty or any of the transactions contemplated by this Guaranty or (ii) against or affecting the undersigned, or any of property or assets of the undersigned, which, if adversely determined, would have a material adverse effect on the business, operations, assets or condition, financial or otherwise, of the undersigned. (g) FINANCIAL BENEFIT. The undersigned has derived or expects to derive a financial or other advantage from each and every loan, advance or extension of credit made under the Documents or other Obligation incurred by Debtor to Laurus. 6. ACCELERATION. (a) If any breach of any covenant or condition or other event of default shall occur and be continuing after applicable notice to Debtor or the undersigned and any applicable opportunity to cure under any agreement made by Debtor or the undersigned to Laurus, or either Debtor or the undersigned should at any time become insolvent, or make a general assignment, or if a proceeding in or under any Insolvency Law shall be filed or commenced by, or in respect of, the undersigned, or if a notice of any lien, levy, or assessment is filed of record with respect to any assets of the undersigned by the United States of America or any department, agency, or instrumentality thereof, or if any taxes or debts owing at any time or times hereafter to any one of them becomes a lien or encumbrance upon any assets of the undersigned in Laurus's possession, or otherwise, any and all Obligations shall for purposes hereof, at Laurus's option, be deemed due and payable without notice notwithstanding that -4- any such Obligation is not then due and payable by Debtor; provided, however, that in the case of any involuntary proceeding in or under any Insolvency Law in respect of the undersigned, no Obligations shall be deemed due and payable pursuant to this Section 6(a) unless the undersigned has failed to have such proceeding dismissed within ninety (90) days. (b) The undersigned will promptly notify Laurus of any default by the undersigned in the performance or observance of any term or condition of any agreement to which the undersigned is a party if the effect of such default is to cause, or permit the holder of any obligation under such agreement to cause, such obligation to become due prior to its stated maturity and, if such an event occurs, Laurus shall have the right to accelerate the undersigned's obligations hereunder. 7. PAYMENTS FROM GUARANTOR. Laurus, in its sole and absolute discretion, with or without notice to the undersigned, may apply on account of the Obligations any payment from the undersigned or any other guarantor, or amounts realized from any security for the Obligations, or may deposit any and all such amounts realized in a non-interest bearing cash collateral deposit account to be maintained as security for the Obligations. 8. COSTS. The undersigned shall pay on demand, all costs, fees and expenses (including reasonable expenses for legal services of every kind) relating or incidental to the enforcement or protection of the rights of Laurus hereunder or under any of the Obligations. 9. NO TERMINATION. This is a continuing irrevocable guaranty and shall remain in full force and effect and be binding upon the undersigned, and the undersigned's successors and assigns, until all of the Obligations have been paid in full and the Documents have been irrevocably terminated. If any of the present or future Obligations are guarantied by persons, partnerships or corporations in addition to the undersigned, the death, release or discharge in whole or in part or the bankruptcy, merger, consolidation, incorporation, liquidation or dissolution of one or more of them shall not discharge or affect the liabilities of the undersigned under this Guaranty. 10. RECAPTURE. Anything in this Guaranty to the contrary notwithstanding, if Laurus receives any payment or payments on account of the liabilities guaranteed hereby, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver, or any other party under any Insolvency Law, common law or equitable doctrine, then to the extent of any sum not finally retained by Laurus, the undersigned's obligations to Laurus shall be reinstated and this Guaranty shall remain in full force and effect (or be reinstated) until payment shall have been made to Laurus, which payment shall be due on demand. 11. BOOKS AND RECORDS. The books and records of Laurus showing the account between Laurus and Debtor shall be admissible in evidence in any action or proceeding, shall be binding upon the undersigned for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. 12. NO WAIVER. No failure on the part of Laurus to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Laurus of any right, remedy or power hereunder preclude any other or future exercise of any other legal right, remedy or power. Each and every right, remedy and power hereby granted to -5- Laurus or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by Laurus at any time and from time to time. 13. WAIVER OF JURY TRIAL. THE UNDERSIGNED DOES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR WITH RESPECT TO THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR RELATING OR INCIDENTAL HERETO. THE UNDERSIGNED DOES HEREBY CERTIFY THAT NO REPRESENTATIVE OR AGENT OF LAURUS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT LAURUS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. 14. GOVERNING LAW; JURISDICTION; AMENDMENTS. THIS INSTRUMENT CANNOT BE CHANGED OR TERMINATED ORALLY, AND SHALL BE GOVERNED, CONSTRUED AND INTERPRETED AS TO VALIDITY, ENFORCEMENT AND IN ALL OTHER RESPECTS IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE UNDERSIGNED EXPRESSLY CONSENTS TO THE JURISDICTION AND VENUE OF THE SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK, AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR ALL PURPOSES IN CONNECTION HEREWITH. ANY JUDICIAL PROCEEDING BY THE UNDERSIGNED AGAINST LAURUS INVOLVING, DIRECTLY OR INDIRECTLY ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED HEREWITH SHALL BE BROUGHT ONLY IN THE SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. THE UNDERSIGNED FURTHER CONSENTS THAT ANY SUMMONS, SUBPOENA OR OTHER PROCESS OR PAPERS (INCLUDING, WITHOUT LIMITATION, ANY NOTICE OR MOTION OR OTHER APPLICATION TO EITHER OF THE AFOREMENTIONED COURTS OR A JUDGE THEREOF) OR ANY NOTICE IN CONNECTION WITH ANY PROCEEDINGS HEREUNDER, MAY BE SERVED INSIDE OR OUTSIDE OF THE STATE OF NEW YORK OR THE SOUTHERN DISTRICT OF NEW YORK BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY PERSONAL SERVICE PROVIDED A REASONABLE TIME FOR APPEARANCE IS PERMITTED, OR IN SUCH OTHER MANNER AS MAY BE PERMISSIBLE UNDER THE RULES OF SAID COURTS. THE UNDERSIGNED WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREON AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. 15. SEVERABILITY. To the extent permitted by applicable law, any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. AMENDMENTS, WAIVERS. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the undersigned therefrom shall in any event be effective unless the same shall be in writing executed by the undersigned and Laurus. -6- 17. NOTICE. All notices, requests and demands to or upon the undersigned, shall be in writing and shall be deemed to have been duly given or made (a) when delivered, if by hand, (b) three (3) days after being sent, postage prepaid, if by registered or certified mail, (c) when confirmed telephonically, if by facsimile, or (d) when delivered, if by a recognized overnight delivery service in each event, to the numbers and/or address set forth beneath the signature of the undersigned. 18. SUCCESSORS. Laurus may, from time to time, without notice to the undersigned, sell, assign, transfer or otherwise dispose of all or any part of the Obligations and/or rights under this Guaranty. Without limiting the generality of the foregoing, Laurus may assign, or grant participations to, one or more banks, financial institutions or other entities all or any part of any of the Obligations. In each such event, Laurus, its Affiliates and each and every immediate and successive purchaser, assignee, transferee or holder of all or any part of the Obligations shall have the right to enforce this Guaranty, by legal action or otherwise, for its own benefit as fully as if such purchaser, assignee, transferee or holder were herein by name specifically given such right. Laurus shall have an unimpaired right to enforce this Guaranty for its benefit with respect to that portion of the Obligations which Laurus has not disposed of, sold, assigned, or otherwise transferred. 19. RELEASE. Nothing except irrevocable payment in full of the Obligations shall release the undersigned from liability under this Guaranty. IN WITNESS WHEREOF, this Guaranty has been executed by the undersigned this 16th day of May, 2005. NESTOR TRAFFIC SYSTEMS, INC. By: /s/ Nigel P. Hebborn ------------------------------------------ Name: Nigel P. Hebborn Title President & CEO Address: 400 Massasoit Avenue Suite 200 East Providence, RI 02914 Telephone No: (401) 434-5522 Facsimile No.: (401) 434-5809 -7- EX-10 7 ex10_47securityagrmt.txt SECURITY AGREEMENT EXHIBIT 10.47 ------------- SECURITY AGREEMENT Nestor Traffic Systems, Inc. To: Laurus Master Fund, Ltd. c/o M&C Corporate Services, Ltd. P.O. Box 309 G.T Ugland House South Church Street Grand Cayman, Cayman Islands Gentlemen: 1. To secure the payment of all Obligations (as hereafter defined), we hereby grant to you a continuing security interest in all of the following property now owned or at any time hereafter acquired by us, or in which we now have or at any time in the future may acquire any right, title or interest (the "Collateral"): all of the undersigned's right, title and interest in and to the contracts set forth on Schedule A attached hereto and made a part hereof, all books, records and other property at any time evidencing or relating to the foregoing, all monies due and to become due under the foregoing contracts, all of our rights in, to and under all purchase orders or receipts for services relating thereto and , all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefor. Capitalized terms used but not defined herein shall have the meanings given them in the Purchase Agreement (defined below.) 2. The term "Obligations" as used herein shall mean and include all debts, liabilities and obligations owing by Nestor, Inc. ("NESTOR") or any of its subsidiaries to Laurus Master Fund, Ltd., arising out of or in connection with: that certain Guaranty dated as of the date hereof made by us in favor of you (as amended, modified and supplemented from time to time, the "Guaranty"); (ii) the Securities Purchase Agreement dated as of the date hereof between NESTOR, Inc. and you (as the same may be amended, modified and supplemented from time to time, the "Purchase Agreement") the Related Agreements referred to in the Purchase Agreement, and, (iii) that certain Convertible Note dated as of the date hereof made by NESTOR in favor of you in the original principal amount of $6,000,000, as amended, modified and supplemented from time to time or otherwise (as each may amended, modified and supplemented from time to time, the "Documents") and in connection with any documents, instruments or agreements relating to or executed in connection with the Documents or any documents, instruments or agreements referred to therein or otherwise, and in connection with any other indebtedness, obligations or liabilities of each of NESTOR or any of its subsidiaries to Laurus, whether now existing or hereafter arising, direct or indirect, liquidated or unliquidated, absolute or contingent, due or not due and whether under, pursuant to or evidenced by a note, agreement, guaranty, instrument or otherwise, including, without limitation, obligations and liabilities of of NESTOR or any of its subsidiaries for post-petition interest, fees, costs and charges that accrue after the commencement of any case by or against such of NESTOR or any of its subsidiaries under any bankruptcy, insolvency, reorganization or like proceeding (collectively, the "Debtor Relief Laws") in each case, irrespective of any collateral therefor or of the existence or extent of such collateral, and irrespective of the allowability, allowance or disallowance of any or all of the Obligations in any case commenced by or against any of NESTOR or any of its subsidiaries under any Debtor Relief Laws. 3. We hereby represent, warrant and covenant to you that: (a) we are a company validly existing, in good standing and formed under the laws of the State of Delaware and we will provide you thirty days prior written notice of any change in our state of formation; (b) our legal name is " Nestor Traffic Systems, Inc. ", as set forth in our Certificate of Incorporation as amended through the date hereof; (c) we are the lawful owner of the Collateral and have the sole right to grant a security interest therein and will defend the Collateral against all claims and demands of all persons and entities; (d) we will keep the Collateral free and clear of all attachments, levies, taxes, liens, security interests and encumbrances of every kind and nature ("Encumbrances") except to the extent said Encumbrance does not secure indebtedness in excess of $100,000 and such Encumbrance is removed or otherwise released within 10 days of the creation thereof; (e) we will at our own cost and expense keep the Collateral in good state of repair and will not waste or destroy the same or any part thereof; (f) we will not without your prior written consent, sell, exchange, lease or otherwise dispose of the Collateral (except for sales or inventory in the ordinary course of business) or any of our rights therein; (g) we will insure the Collateral in your name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as you shall specify in amounts and under policies by insurers acceptable to you and all premiums thereon shall be paid by us and the policies delivered to you. If we fail to do so, you may procure such insurance and the cost thereof shall constitute Obligations; (h) we will at all times allow you or your representatives free access to and the right of inspection of the Collateral; (i) we hereby indemnify and save you harmless from all loss, costs, damage, liability and/or expense, including reasonable attorneys' fees, that you may sustain or incur to enforce payment, performance or fulfillment of any of the Obligations and/or in the enforcement of this Agreement or the Guaranty or in the prosecution or defense of any action or proceeding either against you or us concerning any matter growing out of or in connection with this Agreement, the Guaranty and/or any of the Obligations and/or any of the Collateral; (j) with respect to all accounts arising out of Assigned Contracts (as defined in the Purchase Agreement), the United States of America, or any state, or any department, agency or instrumentality of any of them (each, a "Government Contract"), we will so notify you in writing and comply with any governmental notice or approval requirements, including, without limitation, compliance with the Federal Assignment of Claims Act, (k) each account shall conform to the following criteria: (i) . services shall not have been rejected or disputed by the account debtor and there shall not have been asserted any offset, defense or counterclaim (other than any such rejections, disputes, offsets, defenses or counterclaims which in the aggregate do not at any time exceed $100,000 (ii) the proceeds of such account shall be remitted by the applicable account debtor to and be on deposit in the Pledged Account (as hereafter defined) within forty (40) days from invoice date, and (iii) such Account is a good and valid account representing an undisputed bona fide indebtedness incurred by the account debtor liable therefor, upon the stated terms work, labor and/or services rendered by us; (l) we shall have no access to any funds on deposit in any Pledged Account (as hereafter defined), except to the extent expressly set forth in the Control Agreement (as hereafter defined) and we shall comply with the terms and provisions of the Pledge Agreement and the Control Agreement; and (m) we shall be the direct beneficiary of all funds made available by you to NESTOR under the Note and acknowledge receipt of the proceeds thereof. For purposes hereof, the following terms shall have the following meanings: (1)"Control Agreement" shall mean the Deposit Account Control Agreement dated as of the date hereof among us, you and North Fork Bank (the "Lockbox Bank"), as amended, modified and supplemented from time to time, (2) "Pledged Accounts" shall have the meaning set forth on Schedule A to the Control Agreement. 4. Following the occurrence and during the continuance of an Event of Default, you shall have the right to instruct all of our account debtors to remit payments on all accounts in accordance with your express written instructions: provided, however, the account debtor liable under the Government Contract shall be instructed on or prior to the date hereof to remit payments on all accounts arising under the Government Contract to deposit account number 270-405-4788 in our name at North Fork Bank. With respect to accounts arising from the Government Contract, we shall execute all such documentation as you shall require so as to comply with the Federal Assignment of Claims Act and to instruct the governmental agency party to the Government Contract to remit all accounts arising thereunder to the Pledged Account or such other address and/or deposit account as you shall direct in writing. If, despite such instructions, we shall receive any payments with respect to accounts, we shall receive such payments in trust for your benefit, shall segregate such payments from our other funds and shall deliver or cause to be delivered to you, in the same form as so received with all necessary endorsements, all such payments as soon as practicable, but in no event later than two (2) business days after our receipt -2- thereof. You shall have full power and authority to collect each account, through legal action or otherwise, and may settle, compromise, or assign (in whole or in part) the claim for any account, or otherwise exercise any other right now existing or hereafter arising with respect to any account if such action will facilitate collection. 5. On or prior to the Closing Date (or such later date as may be agreed by you in writing), we, the undersigned will, (x) irrevocably direct all of the present and future Account Debtors (as defined below) and other persons or entities obligated to make payments constituting Collateral to make such payments directly to the lockboxes maintained by Nestor Traffic Systems, Inc., ("NTSI") (the "Lockboxes") with North Fork Bank (the "Lockbox Bank") (each such direction pursuant to this clause (x), a "Direction Notice") and (y) provide you with copies of each Direction Notice, each of which shall be agreed to and acknowledged by the respective Account Debtor. The Lockbox Bank shall agree to deposit the proceeds of such payments immediately upon receipt thereof in that certain deposit account maintained at the Lockbox Bank and evidenced by the account name of Nestor Traffic System, Inc. and the account number of 270-405-4788, or such other deposit account accepted by you in writing (the "Lockbox Deposit Account"). On or prior to the Closing Date, NTSI, , shall and shall cause the Lockbox Bank to enter into all such documentation acceptable to you pursuant to which, among other things, the Lockbox Bank agrees to, following notification by you (which notification you shall only give following the occurrence and during the continuance of an Event of Default), comply only with the instructions or other directions of you concerning the Lockbox and the Lockbox Deposit Account. All of NTSI 's invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account (as hereinafter defined) constituting Collateral or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox or such other address as you may direct in writing. If, notwithstanding the instructions to Account Debtors, any of the undersigned receives any payments, such entity shall immediately remit such payments to the Lockbox Deposit Account in their original form with all necessary endorsements; until so remitted, such entity shall hold all such payments in trust for and as the property of you and shall not commingle such payments with any of its other funds or property. For the purpose of this Security Agreement, (x) "Accounts" shall mean all "accounts", as such term is defined in the Uniform Commercial Code as in effect in the State of New York on the date hereof, now owned or hereafter acquired by NTSI and (y) "Account Debtor" shall mean any person or entity who is or may be obligated with respect to, or on account of any Assigned Contract. 6. We shall be in default under this Agreement upon the happening of any of the following events or conditions, each such event or condition an "Event of Default" (a) we shall fail to pay when due or punctually perform any of the Obligations; (b) any covenant, warranty, representation or statement made or furnished to you by us or on our behalf was false in any material respect when made or furnished; (c) the loss, theft, substantial damage, destruction, sale or encumbrance to or of any of the Collateral or the making of any levy, seizure or attachment thereof or thereon except to the extent said levy, seizure or attachment does not secure indebtedness in excess of $100,000 and such levy, seizure or attachment has not been removed or otherwise released within 10 days of the creation or the assertion thereof; (d) we shall become insolvent, cease operations, dissolve, terminate our business existence, make an assignment for the benefit of creditors, suffer the appointment of a receiver, trustee, liquidator or custodian of all or any part of our property; (e) any proceedings under any bankruptcy or insolvency law shall be commenced by or against us and if commenced against us shall not be dismissed within 30 days; (f) we shall repudiate, purport to revoke or fail to perform any of our obligations under the Guaranty; (g) an Event of Default shall have occurred under and as defined in the Purchase Agreement or the Related Agreements; or (h) an Event of Default shall have occurred under and as defined in the Pledge Agreement or (i) Laurus shall have an effective, valid, binding security interest in the proceeds of less than seventy five percent (75.0%), of the Assigned Contracts, except as contemplated by the Purchase Agreement, provided, however, that failure to meet the aforementioned seventy-five percent (75%) threshold shall not be deemed an Event of Default to the extent that NTSI shall validly pledge, assign and -3- substitute for the Assigned Contracts in the proceeds of which Laurus shall not have an effective, valid, binding enforceable security interest, contracts substantially similar in type and tenor for which consent to assignment of proceeds has been obtained and delivered to Purchaser, if such substitution contracts are otherwise acceptable to Laurus in the exercise of its reasonable discretion. 7. Upon the occurrence of any Event of Default and at any time thereafter, you may declare all Obligations immediately due and payable and you shall have the remedies of a secured party provided in the Uniform Commercial Code as in effect in the State of New York, this Agreement and other applicable law. Upon the occurrence of any Event of Default and at any time thereafter, you will have the right to take possession of the Collateral and to maintain such possession on our premises or to remove the Collateral or any part thereof to such other premises as you may desire. Upon your request, we shall assemble the Collateral and make it available to you at a place designated by you. If any notification of intended disposition of any Collateral is required by law, such notification, if mailed, shall be deemed properly and reasonably given if mailed at least ten days before such disposition, postage prepaid, addressed to us either at our address shown herein or at any address appearing on your records for us. Any proceeds of any disposition of any of the Collateral shall be applied by you to the payment of all expenses in connection with the sale of the Collateral, including reasonable attorneys' fees and other legal expenses and disbursements and the reasonable expense of retaking, holding, preparing for sale, selling, and the like, and any balance of such proceeds may be applied by you toward the payment of the Obligations in such order of application as you may elect, and we shall be liable for any deficiency. 8. If we default in the performance or fulfillment of any of the terms, conditions, promises, covenants, provisions or warranties on our part to be performed or fulfilled under or pursuant to this Agreement, you may, at your option without waiving your right to enforce this Agreement according to its terms, immediately or at any time thereafter and without notice to us, perform or fulfill the same or cause the performance or fulfillment of the same for our account and at our sole cost and expense, and the cost and expense thereof (including reasonable attorneys' fees) shall be added to the Obligations and shall be payable on demand with interest thereon at the highest rate permitted by law or, at your option, debited by you from the Pledged Account. 9. We appoint you, any of your officers, employees or any other person or entity whom you may designate as our attorney, with power to execute such documents in our behalf and to supply any omitted information and correct patent errors in any documents executed by us or on our behalf; to file financing statements against us covering the Collateral; to sign our name on public records; and to do all other things you deem necessary to carry out this Agreement. We hereby ratify and approve all acts of the attorney and neither you nor the attorney will be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law. This power being coupled with an interest, is irrevocable so long as any Obligations remains unpaid. 10. No delay or failure on your part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege, remedy or option, and no waiver whatever shall be valid unless in writing, signed by you and then only to the extent therein set forth, and no waiver by you of any default shall operate as a waiver of any other default or of the same default on a future occasion. Your books and records containing entries with respect to the Obligations shall be admissible in evidence in any action or proceeding, shall be binding upon us for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. You shall have the right to enforce any one or more of the remedies available to you, successively, alternately or concurrently. We agree to join with you in executing financing statements or other instruments to the extent required by the Uniform Commercial Code in form satisfactory to you and in executing such other documents or instruments as may be required or deemed necessary by you for purposes of affecting or continuing your security interest in the Collateral. -4- 11. This Agreement shall be governed by and construed in accordance with the laws of the State of New York and cannot be terminated orally. All of the rights, remedies, options, privileges and elections given to you hereunder shall enure to the benefit of your successors and assigns. The term "you" as herein used shall include your company, any parent of your company, any of your subsidiaries and any co-subsidiaries of your parent, whether now existing or hereafter created or acquired, and all of the terms, conditions, promises, covenants, provisions and warranties of this Agreement shall enure to the benefit of and shall bind the representatives, successors and assigns of each of us and them. You and we hereby (a) waive any and all right to trial by jury in litigation relating to this Agreement and the transactions contemplated hereby and we agree not to assert any counterclaim in such litigation, (b) submit to the nonexclusive jurisdiction of any New York State court sitting in the borough of Manhattan, the city of New York and (c) waive any objection you or we may have as to the bringing or maintaining of such action with any such court. 12. All notices from you to us shall be sufficiently given if mailed or delivered to us at our address set forth below. [Remainder of page intentionally left blank] -5- Very truly yours, NESTOR TRAFFIC SYSTEMS, INC. By: /s/ Nigel P. Hebborn --------------------------------------- Name: Nigel P. Hebborn Title: President and CEO Solely with respect to Section 5 hereof, NESTOR, INC. By: /s/ Nigel P. Hebborn ------------------------------------------ Name: Nigel P. Hebborn Title: Executive Vice President ACKNOWLEDGED: LAURUS MASTER FUND, LTD. By: /s/ David Grin --------------------------------- Name: David Grin Title: Partner -6- SCHEDULE A to the Security Agreement dated as of May 16, 2005 by and among Nestor Traffic Systems, Inc. , Nestor, Inc. and Laurus Master Fund, Ltd. ASSIGNED CONTRACTS Locale Agreement ------ --------- 1. Alpharetta, GA Traffic Signal Violation Video-Enforcement System & Lease Agreement between NTSI and City of Alpharetta, GA dated __ November 2004 2. Baltimore, MD Definitive Subcontract Agreement between ACS State Solutions, Inc. ("ACS") and NTSI dated 13 April 2004 3. Cerritos, CA Automated Traffic Signal Enforcement and Citation Processing Pilot Program for the City of Cerritos between City of Cerritos, CA and NTSI dated 11 July 2002, amended by Addendum 1 (11 September 2003) 4. Costa Mesa, CA Traffic Signal Violation Video-Monitoring System Services Agreement between NTSI and City of Costa Mesa, CA dated 15 July 2002, amended by Addendum 1 (30 April 2003) and Addendum 2 (31 July 2003) 5. Chatham County, GA Traffic Signal Violation Video-Enforcement System Lease & Services Agreement between NTSI and the Savannah Economic Development Authority dated 21 October 2004 6. Falls Church, VA Traffic Signal Violation Photo-Monitoring System Agreement between NTSI and City of Falls Church, VA dated16 December 1999 amended by Addendum 1 (11 February 2003), Addendum 2 (5 September 2003), Addendum 3 (8 October 2003), Addendum 4 (2 March 2004) 7. Frederick, MD Agreement for Services between City of Frederick, MD and NTSI dated 16 December 2004 amended by First Amendment to Agreement for Services (16 December 2004) 8. Fresno, CA Contract: Red Traffic Light Enforcement Program Proposal No. 8262 between City of Fresno, CA and NTSI dated 16 November 2000 amended by First Amendment to Contract (16 November 2000) 9. Fullerton, CA Traffic Signal Violation Video-Monitoring Systems Services Agreement between NTSI and City of Fullerton, CA dated 19 June 2002 amended by Addendum 1 (31 March 2003) and Addendum 2 (31 December 2003) 10. Germantown, TN Traffic Signal Violation Video-Monitoring System Services Agreement between NTSI and City of Germantown, TN dated __ October 2001 11. Irvine, CA Traffic Signal Violation Video-Monitoring System Services Agreement between NTSI and City of Irvine, CA dated 11 December 2001 -7- Locale Agreement ------ --------- 12. Long Beach, CA Agreement between NTSI and City of Long Beach, CA dated 1 December 2004 13. Montclair, CA Traffic Signal Violation Video-Monitoring System Agreement between NTSI and Municipality of Montclair, CA dated 4 September 2001 14. Pasadena, CA Traffic Signal Violation Video-Monitoring System Services Agreement No. 17,712 between NTSI and City of Pasadena, CA dated 24 June 2002 15. Rancho Cucamonga, CA Traffic Signal Violation Photo-Monitoring System Agreement between NTSI and City of Rancho Cucamonga, CA dated 7 March 2001 amended by Addendum 1 (19 March 2003) 16. Vienna, VA Traffic Signal Violation Video-Monitoring System Services Agreement between NTSI and Town of Vienna, VA dated 31 October 2002 17. Davis, CA Any contract subsequently entered into; currently, no contract exists 18. Los Angeles, CA Any contract subsequently entered into; currently, no contract exists 19. New Bern, NC Any contract subsequently entered into; currently, no contract exists 20. San Bernadino, CA Any contract subsequently entered into; currently, no contract exists -8- EX-10 8 ex10_48regrights.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.48 ------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of May 16, 2005, by and between Nestor, Inc., a Delaware corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, between the Purchaser and the Company (the "Purchase Agreement"), and pursuant to the Note and Warrant. The Company and the Purchaser hereby agree as follows: 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "EFFECTIVENESS DATE" means September 16, 2005. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "FILING DATE" means, with respect to the Registration Statement required to be filed hereunder June 16, 2005. "HOLDER" OR "HOLDERS" means the Purchaser or any of its affiliates or transferees to the extent any of them hold Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). "LOSSES" shall have the meaning set forth in Section 5(a). "NOTE" means the convertible promissory note issued on the date hereof. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Common Stock issued upon the conversion of sixmillion dollars aggregate principal amount of the Note and issuable upon exercise of the Warrant. "REGISTRATION STATEMENT" means the registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "WARRANT" means the Common Stock purchase warrant issued pursuant to the Purchase Agreement. 2. REGISTRATION. (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-2 or S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-2 or S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause the Registration Statement to become effective and remain effective as provided herein. The Company shall use its reasonable commercial efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date, and shall keep the Registration Statement continuously effective under the Securities Act until the date set forth in Section 3(b) hereof (the "Effectiveness Period"). (b) If: (i) any Registration Statement is not filed on or prior to the Filing Date; (ii) a Registration Statement filed hereunder is not declared effective by the Commission by the Effectiveness Date; (iii) after a Registration Statement is filed with and declared effective by the Commission, such Registration Statement ceases to be effective (by suspension or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed forty five (45) days in the 2 aggregate per year (defined as a period of 365 days commencing on the date the Registration Statement is declared effective) or more than 20 consecutive calendar days; or (iv) the Common Stock is not listed or quoted, or is suspended from trading on any Trading Market for a period of three (3) consecutive Trading Days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Common Stock on any of the NASD OTC Bulletin Board, NASDAQ SmallCap Market, the Nasdaq National Market, American Stock Exchange or New York Stock Exchange (the "Trading Market"))(any such failure or breach being referred to as an "Event," and for purposes of clause (i), (ii) or (v) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) Trading Day period is exceeded, being referred to as "Event Date"), then until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.0% for each thirty (30) day period (prorated for partial periods) on a daily basis of the aggregate outstanding principal amount of the Note. Such liquidation damages shall be paid not less than each thirty (30) days during an Event and within three (3) days following the date on which such Event has been cured by the Company. 3. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions hereof to effect the registration of the Registrable Securities under the Act, the Company will, as expeditiously as possible: (a) prepare and file with the SEC a registration statement with respect to such securities, promptly as possible respond to any comments received from the SEC and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), and promptly provide to the Purchaser copies of all filings and SEC letters of comment; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the registration statement and to keep such registration statement effective until the earlier of: (i) six months after the latest exercise period of the Warrant; (ii) two (2) years after the Closing Date, (iii) the date on which the Purchaser has disposed of all of the Registrable Securities covered by such registration statement in accordance with the Purchaser's intended method of disposition set forth in such registration statement for such period or (iv) all Registrable Securities may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders; (c) furnish to the Purchaser such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the securities covered by such registration statement; 3 (d) register or qualify the Purchaser's Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Purchaser, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; (f) immediately notify the Purchaser at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser. 4. REGISTRATION EXPENSES. All expenses relating to the Company's compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, reasonable fees of, and disbursements incurred by, one counsel for the Holders, and costs of insurance are called "Registration Expenses". All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called "Selling Expenses." The Company shall be responsible for all Registration Expenses, but not Selling Expenses. 5. INDEMNIFICATION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or 4 are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by the Purchaser or any such person in writing specifically for use in any such document. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Purchaser of Registrable Securities in connection with any such registration under the Securities Act. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 5(c) if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 5(c) for any legal expenses subsequently incurred by 5 such indemnified party in connection with the defense thereof; if the indemnified party retains its own counsel, then the indemnified party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5(c) but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5(c) provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 5(c); then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 6. Representations and Warranties. (a) The Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act. The Company has filed (i) its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, and (ii) its Definitive Proxy for the 2005 Annual Meeting of Stockholders (collectively, the "SEC Reports"). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and 6 regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include notes, may be subject to year-end adjustments or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report. (b) The Company Common Stock is listed for trading on the OTC Bulletin Board and satisfies all requirements for the continuation of such listing. The Company has not received any notice that its Common Stock will be delisted from the OTC Bulletin Board or that the Common Stock does not meet all requirements for the continuation of such listing. (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions. Nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be so integrated with other offerings. (d) The Registrable Securities are restricted securities under the Securities Act as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as the Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws. (e) The Company understands the nature of the Registrable Securities issuable upon the conversion of the Note and the exercise of the Warrant and recognizes that the Registrable Securities may have a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. (f) Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the SEC as an exhibit to a registration statement or to a form required to be filed by the Company under the Securities Exchange Act the breach of which could have a material and adverse effect on the Company and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect. (g) The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full conversion of the Note and exercise of the Warrant. 7 7. MISCELLANEOUS. (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent specified in Schedule 6(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 6(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that has not been fully satisfied. (c) COMPLIANCE. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) DISCONTINUED DISPOSITION. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event, such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Section 7(d), a "Discontinuation Event" shall mean when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (iii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (v) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, 8 as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) PIGGY-BACK REGISTRATIONS. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to the consent of any selling stockholder(s) under such registration statement. (f) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) NOTICES. Any notice or request hereunder may be given to the Company or Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any officer of the party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given when deposited in the mail or with the overnight mail carrier, and, in the case of a telecopy, when confirmed telephonically. The address for such notices and communications shall be as follows: If to the Company: Nestor, Inc. 400 Massasoit Avenue Suite 200 East Providence, RI 02914 Attention: William B. Danzell Facsimile: (401) 434-5809 With a copy to: Benjamin M. Alexander, Esq. 9 If to a Purchaser: To the address set forth under such Purchaser name on the signature pages hereto. If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Note. (i) EXECUTION AND COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) GOVERNING LAW. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to 10 this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. NESTOR, INC. By: /s/ Nigel P. Hebborn ------------------------------------------- Name: Nigel P. Hebborn Title: Executive Vice President [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF PURCHASER TO FOLLOW] 11 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. LAURUS MASTER FUND, LTD. By: /s/ David Grin ------------------------------------------- Name: David Grin Title: Partner Address for Notice: c/o Laurus Capital Management, LLC 825 3rd Ave, 14th Floor New York, New York 10022 Attention: David Grin 12 EX-10 9 ex10_49pledgesec.txt NTSI PLEDGE AND SECURITY AGREEMENT EXHIBIT 10.49 ------------- NTSI PLEDGE AND SECURITY AGREEMENT This Pledge and Security Agreement (this "Agreement") dated as of May 16, 2005 between Laurus Master Fund, Ltd. ("Pledgee") and Nestor Traffic Systems, Inc., a Delaware corporation ("Pledgor"). BACKGROUND Pledgee and Nestor, Inc., the parent corporation of Pledgor. have entered or are entering into a Securities Purchase Agreement dated as of May 16, 2005 (as amended, modified, restated or supplemented from time to time, the "Purchase Agreement") pursuant to which Pledgee provides or will provide certain financial accommodations to Nestor, Inc., the parent corporation of Pledgor. In order to induce Pledgee to enter into the transactions contemplated by the Purchase Agreement and the Related Agreements referred to therein, Pledgor has agreed to pledge and grant a security interest in the collateral described herein to Pledgee on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. All capitalized terms used herein which are not defined shall have the meanings given to them in the Purchase Agreement. 2. PLEDGE AND GRANT OF SECURITY INTEREST. To secure the full and punctual payment and performance of (a) all indebtedness obligations and liabilities of Pledgor to Pledgee under the Purchase Agreement and the Related Agreements referred to thereinand (b) all indebtedness, obligations and liabilities of Pledgor to Pledgee whether now existing or hereafter arising, direct or indirect, liquidated or unliquidated, absolute or contingent, due or not due and whether under, pursuant to or evidenced by the Purchase Agreement or any other note, agreement, guaranty, instrument or otherwise (collectively, the "Indebtedness"), Pledgor hereby assigns, transfers and pledges, assigns, hypothecates, transfers and grants to Pledgee a security interest in the personal property described on Schedule A annexed hereto (collectively, the "Collateral"). 3. REPRESENTATIONS AND WARRANTIES OF PLEDGOR. Pledgor represents and warrants to Pledgee (which representations and warranties shall be deemed to continue to be made until all of the Indebtedness has been paid in full in cash) that: (a) The execution, delivery and performance by Pledgor of this Agreement and the pledge of the Collateral hereunder do not and will not result in any violation of any agreement, indenture, instrument, license, judgment, decree, order, law, statute, ordinance or other governmental rule or regulation applicable to Pledgor. (b) This Agreement constitutes the legal, valid, and binding obligation of Pledgor enforceable against Pledgor in accordance with its terms. (c) Other than a deposit account control agreement to be executed on or prior to the date hereof in favor of and on terms satisfactory to Pledgee by the financial institution at which the Pledged Account (as defined in Schedule A hereto) is maintained, no consent or approval of any person, corporation, governmental body, regulatory authority or other entity, is or will be necessary for the execution, delivery and performance of this Agreement or, the exercise by Pledgee of any rights with respect to the Collateral or for the pledge and assignment of, and the grant of a security interest in, the Collateral hereunder. (d) There are no pending or, to the best of Pledgor's knowledge, threatened actions or proceedings before any court, judicial body, administrative agency or arbitrator which may materially adversely affect the Collateral. (e) Pledgor has the requisite power and authority to enter into this Agreement and to pledge and assign the Collateral to Pledgee in accordance with the terms of this Agreement. (f) Pledgor owns each item of the Collateral and, except for the pledge and security interest granted to Pledgee hereunder, the Collateral is free and clear of any other security interest, pledge, claim, lien, charge, hypothecation, assignment, offset or encumbrance whatsoever (collectively, "Liens"). (g) The pledge and assignment of the Collateral and the grant of a security interest under this Agreement vest in Pledgee all rights of Pledgor in the Collateral as contemplated by this Agreement. 4. AFFIRMATIVE COVENANTS. Until such time as all of the Indebtedness has been paid in full in cash, Pledgor shall: (a) Defend the Collateral against the claims and demands of all other parties and keep the Collateral free from all Liens, except for the Liens granted to Pledgee under this Agreement. (b) In the event Pledgor comes into possession of any portion of the Collateral in violation of the terms of this Agreement, hold the same in trust for Pledgee and deliver to Pledgee such Collateral in the form received no later than one (1) business day following Pledgor's receipt thereof. (c) In the event any portion of the Collateral is held by a third party, take all action that Pledgee may request so as to maintain the validity, enforceability, perfection and priority of Pledgee's security interest in the Collateral. (d) Within two (2) business days of receipt thereof by Pledgor, deliver to Pledgee all notices and statements relating to the Collateral received by Pledgor or any third party holding the Collateral. (e) Notify Pledgee promptly of (a) any adverse event relating to the Collateral or any adverse change in the value of the Collateral and (b) Pledgee's intention to commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect). 2 (f) At the written request of Pledgee at any time and from time to time, at Pledgor's sole expense, promptly take such action and execute and deliver such financing statements, control agreements and further instruments and documents as Pledgee may reasonably request in order to more fully perfect, evidence or effectuate the pledge and assignment hereunder and the security interest granted hereby and to enable Pledgee to exercise and enforce its rights and remedies hereunder. Pledgee is hereby authorized to file one or more financing or continuation statements under the applicable Uniform Commercial Code (as in effect from time to time, the "UCC") relating to the Collateral, naming Pledgee as "secured party." (g) Furnish to Pledgee such other information relating to the Collateral as Pledgee may from time to time reasonably request. 5. NEGATIVE COVENANTS. Until such time as the indebtedness has been paid in full in cash, Pledgor shall not: (a) sell, convey, or otherwise dispose of any of the Collateral or any interest therein or incur or permit to exist any Lien with respect to any of the Collateral or the proceeds thereof other than the Lien granted to Pledgee under this Agreement, (b) have any access to any funds on deposit in the Pledged Account, (c) make or cause to be made any transfers from the Pledged Account, (d) make or cause to be made any withdrawals from the Pledged Account and/or (e) change the ownership of the Pledged Account, other than with the prior written consent of Pledgee. 6. EVENTS OF DEFAULT. The term "Event of Default" wherever used herein shall mean the occurrence of any one of the following events: (a) An "Event of Default" under the Purchase Agreement shall have occurred and shall not have been cured during any applicable cure or grace period; (b) Pledgor's failure to comply with or perform any of its undertakings or obligations under any agreement between Pledgor and Pledgee, including, without limitation, this Agreement; (c) Any representation, warranty, statement or covenant made or furnished to Pledgee by or on behalf of Pledgor in connection with this Agreement and/or the Purchase Agreement proves to have been false in any material respect when made or furnished or is breached, violated or not complied with; (d) Pledgor shall (i) apply for, consent to, or suffer to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or other fiduciary of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence or inform Pledgee of its intention to commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to, or fail to have dismissed, within thirty (30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing; or 3 (e) The Collateral is subjected to levy of execution, attachment, distraint or other judicial process; or the Collateral is the subject of a claim (other than by Pledgee) of a Lien or other right or interest in or to the Collateral. 7. REMEDIES. Upon the occurrence of an Event of Default, Pledgee may: (i) Demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, realize upon the Collateral (or any part thereof) or debit the Pledged Account (as defined in Schedule A hereto), in each case as Pledgee may determine in its sole discretion; (ii) Transfer the Collateral into its name or into the name of its nominee or nominees; (iii) Subject to the requirements of applicable law, sell, assign and deliver the whole or, from time to time any part of the Collateral, with or without demand, advertisement or notice of the time or place of sale or adjournment thereof or otherwise (all of which are hereby waived, except such notice as is required by applicable law and cannot be waived), for such price or prices and on such terms as Pledgee in its sole discretion may determine. Pledgor acknowledges and agrees that ten (10) days' prior written notice of the time and place of any public sale of any of the Collateral or any other intended disposition thereof shall be reasonable and sufficient notice to Pledgor within the meaning of the UCC. Pledgor hereby waives and releases any and all right or equity of redemption, whether before or after sale hereunder. In addition to the foregoing, Pledgee shall have all of the rights and remedies of a secured party under applicable law and the UCC. 8. PROCEEDS OF COLLATERAL AGREEMENT. The proceeds of any disposition of the Collateral under this Agreement shall be applied as follows: (a) First, to the payment of all costs, expenses and charges of Pledgee and to the reimbursement of Pledgee for the prior payment of such costs, expenses and charges incurred in connection with the care and safekeeping of the Collateral (including, without limitation, the expenses of any sale or any other disposition of any of the Collateral), the expenses of any taking, attorneys' fees and expenses, court costs, any other fees or expenses incurred or expenditures or advances made by Pledgee in the protection, enforcement or exercise of its rights, powers or remedies hereunder, with interest on any such reimbursement at the rate prescribed in the Note from the date of payment; (b) Second, to the payment of the Obligations, in whole or in part, in such order as Pledgee may elect, whether or not such Obligation is then due; (c) Third, to such persons, firms corporations or other entities as required by applicable law including, without limitation the UCC; and 4 (d) Fourth, to the extent of any surplus to Pledgor or as a court of competent jurisdiction may direct. In the event that the proceeds of any collection, recovery, receipt, appropriation, realization or sale are insufficient to satisfy the Indebtedness, Pledgor shall be liable for the deficiency together with interest thereon at the rate prescribed in the Note plus the costs and fees of any attorneys employed by Pledgee to collect such deficiency. 9. WAIVER OF MARSHALING. Pledgor hereby waives any right to compel any marshaling of any of the Collateral. 10. NO WAIVER. Any and all of Pledgee's rights with respect to the Liens granted under this Agreement shall continue unimpaired, and Pledgor shall be and remain obligated in accordance with the terms hereof, notwithstanding (a) the bankruptcy, insolvency or reorganization of Pledgor, (b) the release or substitution of any item of the Collateral at any time, or of any rights or interests therein, or (c) any delay, extension of time, renewal, compromise or other indulgence granted by Pledgee in reference to any of the Indebtedness. Pledgor hereby waives all notice of any such delay, extension, release, substitution, renewal, compromise or other indulgence, and hereby consents to be bound hereby as fully and effectively as if Pledgor had expressly agreed thereto in advance. No delay or extension of time by Pledgee in exercising any power of sale, option or other right or remedy hereunder, and no failure by Pledgee to give notice or make demand, shall constitute a waiver thereof, or limit, impair or prejudice Pledgee's right to take any action against Pledgor or to exercise any other power of sale, option or any other right or remedy. 11. EXPENSES. The Collateral shall secure, and Pledgor shall pay to Pledgee on demand, from time to time, all costs and expenses, (including but not limited to, attorneys' fees and costs, taxes, and all transfer, recording, filing and other charges) of, or incidental to, the custody, care, transfer, administration of the Collateral or any other collateral, or in any way relating to the enforcement, protection or preservation of the rights or remedies of Pledgee under this Agreement or with respect to any of the Indebtedness. 12. PLEDGEE APPOINTED ATTORNEY-IN-FACT AND PERFORMANCE BY PLEDGEE. Upon the occurrence of an Event of Default, Pledgor hereby irrevocably constitutes and appoints Pledgee as Pledgor's true and lawful attorney-in-fact, with full power of substitution, to execute, acknowledge and deliver any instruments and to do in Pledgor's name, place and stead, all such acts, things and deeds for and on behalf of and in the name of Pledgor, which Pledgor could or might do or which Pledgee may deem necessary, desirable or convenient to accomplish the purposes of this Agreement, including, without limitation, to execute such instruments of assignment or transfer or orders and to register, convey or otherwise transfer title to the Collateral into Pledgee's name. Pledgor hereby ratifies and confirms all that said attorney-in-fact may so do and hereby declares this power of attorney to be coupled with an interest and irrevocable. If Pledgor fails to perform any agreement herein contained, Pledgee may itself perform or cause performance thereof, and any costs and expenses of Pledgee incurred in connection therewith shall be paid by Pledgor as provided in Section 11 hereof. 5 13. CAPTIONS. All captions in this Agreement are included herein for convenience of reference only and shall not constitute part of this Agreement for any other purpose. 14. MISCELLANEOUS. (a) This Agreement constitutes the entire and final agreement among the parties with respect to the subject matter hereof and may not be changed, terminated or otherwise varied except by a writing duly executed by the parties hereto. (b) No waiver of any term or condition of this Agreement, whether by delay, omission or otherwise, shall be effective unless in writing and signed by the party sought to be charged, and then such waiver shall be effective only in the specific instance and for the purpose for which given. (c) In the event that any provision of this Agreement or the application thereof to Pledgor or any circumstance in any jurisdiction governing this Agreement shall, to any extent, be invalid or unenforceable under any applicable statute, regulation, or rule of law, such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute, regulation or rule of law, and the remainder of this Agreement and the application of any such invalid or unenforceable provision to parties, jurisdictions, or circumstances other than to whom or to which it is held invalid or unenforceable shall not be affected thereby, nor shall same affect the validity or enforceability of any other provision of this Agreement. (d) This Agreement shall be binding upon Pledgor, and Pledgor's successors and assigns, and shall inure to the benefit of Pledgee and its successors and assigns. (e) Any notice or other communication required or permitted pursuant to this Agreement shall be given in accordance with the notice provisions of the Purchase Agreement. (f) This Agreement shall be governed by and construed and enforced in all respects in accordance with the laws of the State of New York applied to contracts to be performed wholly within the State of New York. (g) EACH PARTY HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OTHER AGREEMENT EXECUTED OR DELIVERED BY THEM IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HERETO HEREBY AGREES AND CONSENTS THAT ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 6 (h) PLEDGOR EXPRESSLY CONSENTS TO THE JURISDICTION AND VENUE OF EACH COURT OF COMPETENT JURISDICTION LOCATED IN THE STATE OF NEW YORK FOR ALL PURPOSES IN CONNECTION WITH THIS AGREEMENT. ANY JUDICIAL PROCEEDING BY PLEDGOR AGAINST PLEDGEE INVOLVING, DIRECTLY OR INDIRECTLY ANY MATTER OR CLAIM IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT SHALL BE BROUGHT ONLY IN A STATE COURT LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK. PLEDGOR FURTHER CONSENTS THAT ANY SUMMONS, SUBPOENA OR OTHER PROCESS OR PAPERS (INCLUDING, WITHOUT LIMITATION, ANY NOTICE OR MOTION OR OTHER APPLICATION TO EITHER OF THE AFOREMENTIONED COURTS OR A JUDGE THEREOF) OR ANY NOTICE IN CONNECTION WITH ANY PROCEEDINGS HEREUNDER, MAY BE SERVED INSIDE OR OUTSIDE OF THE STATE OF NEW YORK OR THE SOUTHERN DISTRICT OF NEW YORK BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR BY PERSONAL SERVICE PROVIDED A REASONABLE TIME FOR APPEARANCE IS PERMITTED, OR IN SUCH OTHER MANNER AS MAY BE PERMISSIBLE UNDER THE RULES OF SAID COURTS. PLEDGOR WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREON AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM NON CONVENIENS. (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed an original signature hereto. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. NESTOR TRAFFIC SYSTEMS, INC. By: /s/Nigel P. Hebborn ---------------------------------------- Name: Nigel P. Hebborn Its: President and CEO LAURUS MASTER FUND, LTD. By: /s/ David Grin ---------------------------------------- Name: David Grin Its: Partner 7 SCHEDULE A Description of Collateral All of Pledgor's right, title and interest in and to deposit account (the "Pledged Account") number _______________ maintained with North Fork Bank ("Bank"), all contract rights, claims and privileges in respect of the Pledged Account, all cash, checks, money orders and other items of value of Pledgor now or hereafter paid to, deposited in, credited to, held (whether for collection, provisionally or otherwise) for deposit in or otherwise in the possession or under the control of, or in transit to, Bank or any agent, bailee or custodial thereof for deposit in the Pledged Account, and all interest and income received therefrom, all substitutions therefor and all proceeds thereof in any form. EX-10 10 ex10_50warrant.txt COMMON STOCK PURCHASE WARRANT EXHIBIT 10.50 ------------- THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO NESTOR, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase 100,000 Shares of Common Stock of Nestor, Inc. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 2005-1 Issue Date: May 16, 2005 NESTOR, INC., a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through May 16, 2010 (five (5) years after such date) (the "Expiration Date"), up to 100,000 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $.01 par value per share, of the Company, at the Purchase Price (as defined below). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. Capitalized terms used but not otherwise defined shall have them in the Securities Purchase Agreement dated the date hereof by and among the Company, Nestor Traffic Systems, Inc., and the Holder. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include Nestor, Inc. and any corporation which shall succeed or assume the obligations of Nestor, Inc. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, $.01 par value per share, as authorized on the date of the Securities Purchase Agreement referred to in Section 9 hereof, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. (d) The term "Purchase Price" shall determined as follows: a. 60,000 shares at $6.69 per share. b. 23,000 shares at $7.28 per share. c. 17,000 shares at $8.43 per share. 1 1. EXERCISE OF WARRANT. 1.1. NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the date hereof through and including the Expiration Date, the holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. FULL EXERCISE. This Warrant may be exercised in full by the holder hereof by delivery of an original or fax copy of the form of subscription attached as Exhibit A hereto (the "Subscription Form") duly executed by such Holder, to the Company at its principal office or at the office of its warrant agent (as provided hereinafter), accompanied by payment, in cash, wire transfer, or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.3. PARTIAL EXERCISE. This Warrant may be exercised in part (but not for a fractional share) by surrender of this Warrant in the manner and at the place provided in subsection 1.2 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, the Company, at its expense, will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, the number of shares of Common Stock for which such Warrant may still be exercised. 1.4. FAIR MARKET VALUE. Fair Market Value of a share of Common Stock as of a particular date (the "Determination Date") shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then the average closing or last sale price, respectively, reported for the ten business days immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the ten business days immediately preceding the Determination Date. (c) If the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. 1.5. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 2 1.6. TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or trust company shall have been appointed as trustee for the Company pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2.1 DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 7 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable Securities Laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2. PAYMENT OF PURCHASE PRICE. (a) Payment may be made either in (i) cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Purchase Price, (ii) by delivery of the Warrant, Common Stock and/or Common Stock receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Subscription Form in which event the Company shall issue to the holder a number of shares of Common Stock computed using the following formula: X=Y (A-B) ---- A --------- Where X= the number of shares of Common Stock to be issued to the holder Y= the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A= the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B= Purchase Price (as adjusted to the date of such calculation) 3 3. Adjustment for Reorganization, Consolidation, Merger, etc. 3.1. Reorganization, Consolidation, Merger, etc. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the holder of this Warrant, upon the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. 4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased or decreased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other 4 Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT; FINANCIAL STATEMENTS. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. This Warrant entitles the holder hereof to receive copies of all financial and other information distributed or required to be distributed to the holders of the Company's Common Stock. 7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with applicable Securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "Transferor") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable Securities Laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of federal securities laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. REGISTRATION RIGHTS. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Securities Purchase Agreement entered into by the Company and the Holder. 10. MAXIMUM EXERCISE. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this proviso is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.9%. The restriction described in this paragraph is automatically null and void upon an Event of Default under the Note. 11. WARRANT AGENT. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging 5 this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. NOTICES, ETC. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 14. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 6 IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. NESTOR, INC. By: /s/ Nigel P. Hebborn --------------------------------- Nigel P. Hebborn Executive Vice President Witness: /s/ Mary Ann Brnain - ------------------------------ Mary Ann Branin Executive Assistant 7 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: Nestor, Inc. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is ______________________________________ ____________________________________ . The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated: -------------- -------------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) -------------------------------------------- (Address) 8 Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person( s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Nestor, Inc. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Nestor, Inc. with full power of substitution in the premises. ============================ ========================= ========================= Percentage Number Transferees Transferred Transferred ----------- ----------- ----------- - ---------------------------- ------------------------- ------------------------- - ---------------------------- ------------------------- ------------------------- - ---------------------------- ------------------------- ------------------------- - ---------------------------- ------------------------- ------------------------- - ---------------------------- ------------------------- ------------------------- - ---------------------------- ------------------------- ------------------------- ============================ ========================= ========================= Dated: -------------- -------------------------------------------- (Signature must conform to name of holder as specified on the face of the Warrant) Signed in the presence of: - ------------------------------- -------------------------------------------- (Name) (address) -------------------------------------------- ACCEPTED AND AGREED: (address) [TRANSFEREE] - --------------------------------- (Name) 9 EX-10 11 ex10_51allongetonote.txt ALONGE TO CONVERTIBLE NOTE EXHIBIT 10.51 ------------- ALLONGE TO CONVERTIBLE NOTE This ALLONGE TO CONVERTIBLE NOTE supplements and is hereby made a part of that certain Convertible Note made by NESTOR, INC., a Delaware corporation to LAURUS MASTER FUND, LTD., c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 dated May 16, 2005 in the principal amount of Six Million Dollars ($6,000,000) (the "Note"). Capitalized terms used herein but not defined herein shall have the meanings assigned to them by the Note. The Note is hereby amended by the addition of a Section 3.4 to Article III, to be inserted immediately following the existing Section 3.3, which Section 3.4 shall read: 3.4 Limitation on Conversions. Notwithstanding anything contained herein to the contrary, the Holder shall not be entitled to convert pursuant to the terms of this Note an amount that would be convertible into that number of Conversion Shares which would exceed the difference between (i) 4.99% of the issued and outstanding shares of Common Stock and (ii) the number of shares of Common Stock beneficially owned by the Holder (the "Conversion Share Limitation"). For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The Conversion Share Limitation described in this Section 3.4 shall automatically become null and void following notice to the Company upon the occurrence and during the continuance of an Event of Default, or upon 75 days prior notice to the Company, except that at no time shall the number of shares of Common Stock beneficially owned by the Holder a exceed 19.99% of the outstanding shares of Common Stock. Notwithstanding anything contained herein to the contrary, if any shares of Common Stock are issuable by the Company and acquirable by the Holder at a price below $5.40 per share pursuant to the terms of this Note, the number of shares of Common Stock issuable by the Company and acquirable by the Holder pursuant to the terms of this Note, the Purchase Agreement or any other Related Agreement, shall not exceed an aggregate of 3,743,618 shares of Common Stock (subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Common Stock) (the "Maximum Common Stock Issuance"), unless the issuance of Common Stock hereunder in excess of the Maximum Common Stock Issuance shall first be approved by the Company's shareholders. If at any point in time and from time to time the number of shares of Common Stock issued pursuant to the terms of this Note, the Purchase Agreement or any other Related Agreement, together with the number of shares of Common Stock that would then be issuable by the Company to the Holder in the event of a conversion or exercise pursuant to the terms of this Note, the Purchase Agreement or any other Related Agreement, would exceed the Maximum Common Stock Issuance but for this Section 3.4, the Company shall promptly call a shareholders meeting to solicit shareholder approval for the issuance of the shares of Common Stock hereunder in excess of the Maximum Common Stock Issuance. Notwithstanding anything contained herein to the contrary, the provisions of this Section 3.4 are irrevocable and may not be waived by the Holder or the Company. Except as modified by the addition of Section 3.4, all other terms and conditions of the Note remain in full force and effect. IN WITNESS WHEREOF, the Borrower and Holder have caused this Allonge to be signed in their respective names effective as of this 3rd day of June, 2005. NESTOR, INC. By: /s/ Nigel P. Hebborn ------------------------------------ Nigel P. Hebborn Executive Vice President LAURUS MASTER FUND, LTD. By: /s/ David Grin ------------------------------------ David Grin Partner EX-23 12 ex23_1ccrconsent.txt CCR CONSENT EXHIBIT 23.1 ------------ Consent of Independent Registered Public Accounting Firm We hereby consent to the use in this Registration Statement on Form S-2 and related prospectus (Sec File No. 333- _ _ _ _ _ _) for the registration of 1,130,927 shares of common stock filed by Nestor, Inc. of our report dated March 18, 2005, relating to the financial statements which appear in Nestor, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission. We also consent to the reference to us under the heading "Experts" in such Form S-2 Registration Statement. /s/Carlin, Charron & Rosen, LLP Providence, Rhode Island June 22 2005 -----END PRIVACY-ENHANCED MESSAGE-----