-----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, Nt4XZ4SbkJHhAVongOG1I/FiMXxU1ov19ihhnPaRoKn/VQmNjmcMyGmVng0MaoQ4 yWEf0CFzX7ifKGiftnftYw== 0000950172-96-000136.txt : 19960318 0000950172-96-000136.hdr.sgml : 19960318 ACCESSION NUMBER: 0000950172-96-000136 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960315 SROS: NONE GROUP MEMBERS: MR. BRUCE W. SCHNITZER GROUP MEMBERS: WAND (NESTOR) INC. GROUP MEMBERS: WAND NESTOR INVESTMENTS L P ET AL GROUP MEMBERS: WAND/NESTOR INVESTMENTS II L.P. GROUP MEMBERS: WAND/NESTOR INVESTMENTS III L.P. GROUP MEMBERS: WAND/NESTOR INVESTMENTS L.P. SUBJECT COMPANY: 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: 0630 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-35599 FILM NUMBER: 96535109 BUSINESS ADDRESS: STREET 1: ONE RICHMOND SQ CITY: PROVIDENCE STATE: RI ZIP: 02906 BUSINESS PHONE: 4013319640 MAIL ADDRESS: STREET 1: 1 RICHMOND SQUARE CITY: PROVIDENCE STATE: RI ZIP: 02906 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: WAND NESTOR INVESTMENTS L P ET AL CENTRAL INDEX KEY: 0000928539 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133783175 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 630 FIFTH AVE STREET 2: STE 2435 CITY: NEW YORK STATE: NY ZIP: 10111 BUSINESS PHONE: 2126323795 MAIL ADDRESS: STREET 1: 630 FIFTH AVE STREET 2: STE 2435 CITY: NEW YORK STATE: NY ZIP: 10111 SC 13D/A 1 SCHEDULE 13D AMENDMENT NO. 5 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. 5) NESTOR, INC. (Name of Issuer) COMMON STOCK, PAR VALUE $.01 (Title of Class and Securities) 64107410 (CUSIP Number of Class of Securities) Bruce W. Schnitzer Wand (Nestor) Inc. 630 Fifth Avenue, Suite 2435, New York, NY 10111 (212) 632-3795 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) Copy to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022 (212) 735-3000 ATTN: Nancy Henry March 7, 1996 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Statement because of Rule 13d-1(b)(3) or (4), check the following: ( ) Check the following box if a fee is being paid with this Statement: ( ) SCHEDULE 13D CUSIP NO. 64107410 PAGE ____ OF ____ PAGES 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON WAND/NESTOR INVESTMENTS L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ( ) (b) ( ) 3 SEC USE ONLY 4 SOURCE OF FUNDS* 00 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) ( ) 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE 7 SOLE VOTING POWER 3,582,138 NUMBER OF SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 3,582,138 PERSON WITH 10 SHARED DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,582,138 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES* ( ) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 31.29% 14 TYPE OF REPORTING PERSON* PN *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 SCHEDULE 13D CUSIP NO. 64107410 PAGE ____ OF ____ PAGES 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON WAND/NESTOR INVESTSMENTS II L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ( ) (b) ( ) 3 SEC USE ONLY 4 SOURCE OF FUNDS* 00 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) ( ) 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE 7 SOLE VOTING POWER 382,536 NUMBER OF SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 382,536 PERSON WITH 10 SHARED DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 382,536 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES* ( ) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 4.59% 14 TYPE OF REPORTING PERSON* PN *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 SCHEDULE 13D CUSIP NO. 64107410 PAGE ____ OF ____ PAGES 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON WAND/NESTOR INVESTMENTS III L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ( ) (b) ( ) 3 SEC USE ONLY 4 SOURCE OF FUNDS* 00 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) ( ) 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE 7 SOLE VOTING POWER 1,756,696 NUMBER OF SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 1,756,696 PERSON WITH 10 SHARED DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,756,696 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES* ( ) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 18.22% 14 TYPE OF REPORTING PERSON* PN *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 SCHEDULE 13D CUSIP NO. 64107410 PAGE ____ OF ____ PAGES 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON WAND (NESTOR) INC. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ( ) (b) ( ) 3 SEC USE ONLY 4 SOURCE OF FUNDS* 00 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) ( ) 6 CITIZENSHIP OR PLACE OF ORGANIZATION DELAWARE 7 SOLE VOTING POWER 5,721,370 NUMBER OF SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 5,721,370 PERSON WITH 10 SHARED DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,721,370 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES* ( ) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 42.37% 14 TYPE OF REPORTING PERSON* CO *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 SCHEDULE 13D CUSIP NO. 64107410 PAGE ____ OF ____ PAGES 1 NAMES OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON MR. BRUCE W. SCHNITZER 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ( ) (b) ( ) 3 SEC USE ONLY 4 SOURCE OF FUNDS* 00 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) ( ) 6 CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES OF AMERICA 7 SOLE VOTING POWER 5,721,370 NUMBER OF SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY EACH 9 SOLE DISPOSITIVE POWER REPORTING 5,721,370 PERSON WITH 10 SHARED DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,721,370 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 EXCLUDES CERTAIN SHARES* ( ) 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 42.37% 14 TYPE OF REPORTING PERSON* IN *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 The Statement on Schedule 13D filed on August 15, 1994, and amended on April 18, 1995, July 12, 1995, October 5, 1995 and February 13, 1996, with respect to the common stock, par value $.01 per share (the "Common Stock") of Nestor, Inc., a Delaware corporation (the "Company"), is hereby further amended as follows: Item 3. Source and Amount of Funds or Other Consideration. Item 3 is hereby supplemented as follows: Pursuant to a Securities Purchase Agreement, dated as of March 7, 1996 (the "March Securities Purchase Agreement") between the Company and the Wand/Nestor Partnership, the Wand/Nestor Partnership purchased (1) 777 shares of a new class of convertible preferred stock of the Company, par value $1.00 per share, designated as Series G (the "Series G Preferred Stock") and (2) related warrants to purchase up to an aggregate of 225,330 shares of Company Common Stock at an initial exercise price of $1.25 per share (the "Series G Warrant") for an aggregate cash purchase price of $777,000. The Series G Warrant is exercisable after July 1, 1996. Copies of the March Securities Purchase Agreement, the Amended Certificate of Powers, Designations, Preferences and Special Rights of the Series G Preferred Stock and the Series G Warrant are attached hereto as Exhibits 1, 3 and 4, respectively. The sale of the Series G Preferred Stock and the Series G Warrant to the Wand/Nestor Partnership described above was consummated on March 7, 1996. All of the consideration for the purchase was provided by the partners of the Wand/Nestor Partnership participating in the ownership of this investment. Item 4. Purpose of the Transaction. Item 4 is hereby supplemented as follows: The Wand/Nestor Partnership acquired the Series G Preferred Stock and the Series G Warrant for investment. Upon consummation of the purchase of the Series G Preferred Stock and the Series G Warrant, the Company, the Wand/Nestor Partnership, the Wand/Nestor II Partnership, the Wand/Nestor III Partnership and certain other securityholders of the Company entered into Amendment No. 1 to the Amended and Restated Registration Rights Agreement, a copy of which is attached hereto as Exhibit 2. None of the Filing Persons, or, to the best knowledge of the Filing Persons, Mr. Callard, has any plans or proposals which relate to, or could result in, any of the matters referred to in paragraphs (b) through (j) of Item 4 of Schedule 13D, except, as discussed more fully in Item 6 below, the terms of the March Securities Purchase Agreement and the Series G Preferred Stock provide for representation of the Wand/Nestor Partnership on the Company's Board of Directors. Item 5. Interest in Securities of the Issuer. Item 5(a) is hereby amended as follows: (a) As of the date hereof, as a result of the consummation on March 7, 1996 of the transactions contemplated by the March Securities Purchase Agreement, the Wand/Nestor Partnership, the Wand/Nestor II Partnership and the Wand/Nestor III Partnership may each be deemed pursuant to the Exchange Act and the rules and regulations promulgated thereunder to beneficially own, respectively, approximately 31.29%, 4.59% and 18.22% of the outstanding shares of Common Stock of the Company. As of the date hereof, as a result of the relationships and stock ownership discussed above, the General Partner and Mr. Schnitzer may each be deemed, pursuant to the Exchange Act and the rules and regulations promulgated thereunder, to beneficially own approximately 42.37% of the outstanding shares of Common Stock of the Company. Except as set forth in this Item 5(a), none of the Filing Persons or, to the best knowledge of the Filing Persons, Mr. Callard, beneficially owns any shares of Company Common Stock. Item 5(b) is hereby amended as follows: (b) The Wand/Nestor Partnership and the Wand/Nestor II Partnership each has sole power to vote or direct the vote and sole power to dispose or direct the disposition of the shares of Company Common Stock beneficially owned by it as a consequence of its ownership, of record and beneficially, of Common Stock, Series D Preferred Stock, Series H Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and the several warrants to acquire Common Stock. The Wand/Nestor III Partnership has sole power to vote or direct the vote and sole power to dispose or direct the disposition of shares of Company Common Stock beneficially owned by it as a consequence of its ownership, of record and beneficially, of Common Stock, Series D Preferred Stock, Series E Preferred Stock and warrants to acquire Common Stock of the Company. By virtue of their relationship to the Wand/Nestor Partnership, the Wand/Nestor II Partnership and the Wand/Nestor III Partnership, the General Partner and Mr. Schnitzer may each be deemed to have concurrent indirect power to vote or to direct the vote and to dispose or to direct the disposition of all such shares. Holders of Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock are entitled to vote on all matters as to which shareholders of the Company are entitled to vote, with each holder entitled to cast a number of votes equal to the greatest number of whole shares of Common Stock into which such holder's shares of Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Series H Preferred Stock could be converted. (c) Pursuant to the Securities Purchase and Exchange Agreement described in Amendment No. 4 to this Schedule 13D, the Company sold Series F Preferred Stock and related Warrants to the Wand/Nestor Partnership and the Wand/Nestor II Partnership in a private placement transaction. Except for the transactions related to the consummation of the Securities Purchase and Exchange Agreement and the March Securities Purchase Agreement, none of the Filing Persons, nor, to the best knowledge of the Filing Persons, Mr. Callard has effected any transactions in Common Stock of the Company during the past 60 days. Item 6. Contracts, Understandings or Relationships with respect to Securities of the Issuer. Item 6 is hereby supplemented as follows: Upon consummation of the March Securities Purchase Agreement, the Company, the Wand/Nestor Partnership, the Wand/Nestor II Partnership, the Wand/Nestor III Partnership and certain other stockholders of the Company entered into Amendment No. 1 to the Amended and Restated Registration Rights Agreement dated as of March 7, 1996, a copy of which is attached hereto as Exhibit 2. Item 7. Material to Be Filed as Exhibits. Exhibit 1 - March Securities Purchase Agreement, dated as of March 7, 1996, between the Company and the Wand/Nestor Partnership Exhibit 2 - Amendment No. 1 to the Amended and Restated Registration Rights Agreement, dated as of March 7, 1996 Exhibit 3 - Amended Certificate of Powers, Designations, Preferences and Special Rights of Series G Convertible Preferred Stock of the Company Exhibit 4 - Common Stock Purchase Warrant No. W-Y, respecting 225,330 shares of Company Common Stock, dated March 7, 1996 and issued to the Wand/Nestor Partnership in connection with its purchase of Series G Preferred Stock Exhibit 5 - Joint Filing Agreement SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Dated: March 12, 1996 WAND/NESTOR INVESTMENTS L.P. By: WAND (NESTOR) INC., as general partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Dated: March 12, 1996 WAND/NESTOR INVESTMENTS II L.P. By: WAND (NESTOR) INC., as general partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Dated: March 12, 1996 WAND/NESTOR INVESTMENTS III L.P. By: WAND (NESTOR) INC., as general partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman SIGNATURE After reasonable inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Dated: March 12, 1996 WAND (NESTOR) INC. By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct. Dated: March 12, 1996 By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer EXHIBIT INDEX Exhibit No. Exhibit Name Page No. 1 March Securities Purchase Agreement, dated as of March 7, 1996, between the Company and the Wand/Nestor Partnership . . . . . . . . . . . . 2 Amendment No. 1 to Amended and Restated Registration Rights Agreement, dated as of March 7, 1996 . . . . . . . . . . . . . . . . . . . . . . 3 Amended Certificate of Powers, Designations, Preferences and Special Rights of Series G Convertible Preferred Stock of the Company . . . . . . . . . . . . . . . . . . 4 Common Stock Purchase Warrant No. W-Y, respecting 225,330 shares of Company Common Stock, dated March 7, 1996 and issued to the Wand/Nestor Partnership in connection with its purchase of Series G Preferred Stock . . . . . . . . . . . . 5 Joint Filing Agreement . . . . . . . . . . . . . EX-99 2 EXHIBIT 1 EXHIBIT 1 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement") is made as of the 7th day of March, 1996 by and among Nestor, Inc., a Delaware corporation (the "Company") and Wand/Nestor Investments L.P., a Delaware limited partnership (the "Purchaser"). RECITALS A. The Purchaser currently owns the following securities of the Company: (1) common stock, par value $.01 per share ("Company Common Stock"); (2) Series H Convertible Preferred Stock, par value $1.00 per share ("Series H Preferred Stock"); (3) Series D Convertible Preferred Stock, par value $1.00 per share ("Series D Preferred Stock"); (4) Series F Convertible Preferred Stock, par value $1.00 per share ("Series F Preferred Stock"); (5) certain common stock purchase warrants to purchase shares of Company Common Stock at various exercise prices (the "Old Warrants"). B. The Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, (1) 777 shares of a new class of convertible preferred stock of the Company, par value $1.00 per share (the "Series G Preferred Stock") having the terms set forth in the Company's Certificate of Designation of the Terms of the Series G Preferred Stock in the form set forth as Exhibit I, and (2) Warrants to purchase up to an aggregate of 225,330 shares of Company Common Stock in the form set forth as Exhibit II (the "New Warrants"); C. Concurrently herewith the Company, the Purchaser and certain other parties are entering into the Amended and Restated Registration Agreement, dated as of March 7, 1996, in the form set forth as Exhibit III (the "Registration Rights Agreement"). D. Concurrently with the consummation of this Agreement the Company will enter into the amendments (the "Revised Agreements") set forth on Exhibit IV hereto to certain existing agreements and securities of the Company for the purpose of conforming such agreements and securities to the terms of securities to be issued pursuant to this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. SALE AND PURCHASE OF COMPANY SECURITIES; OTHER TRANSACTIONS. The Company has authorized the issuance and sale to the Purchaser, (i) 777 shares (the "Series G Preferred Shares") of the Series G Preferred Stock and (ii) the New Warrants. Subject to the terms and conditions herein set forth, the Company will issue and sell to the Purchaser, and the Purchaser will purchase from the Company, at the Closing (as defined below) the Series G Preferred Shares and the New Warrants. The aggregate purchase price for the Series G Preferred Shares and New Warrant shall be $777,000 in cash (the "Series G Purchase Price"). 2. CLOSING. (a) Subject to the applicable provisions of Sections 7, 8, and 9 hereof, the closing of the sale of the Series G Preferred Shares and the New Warrants (the "Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York 10022, as soon as practicable following the satisfaction or waiver of the applicable conditions set forth in Sections 7, 8 and 9 hereof. (b) At the Closing, (i) the Company shall deliver to the Purchaser certificates evidencing the respective number of Series G Preferred Shares and New Warrants to be purchased by the Purchaser, (ii) the Purchaser shall deliver to the Company the Series G Purchase Price by wire transfer of immediately available funds to an account designated by the Company, and (iii) the parties shall make such other deliveries as are contemplated hereby. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization, Standing and Power of the Company. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite power and authority to own, lease and operate its properties, assets and business and to conduct its business as now being conducted and is duly qualified to do business as a foreign corporation in good standing in those jurisdictions, other than the state of its incorporation, in which the nature of the business conducted or property owned by it makes such qualification necessary, except for any failures so to qualify which would not have, individually or in the aggregate, a material adverse effect on the business, condition or results of operations of the Company (a "Company Material Adverse Effect"). (b) Authority; Enforceability; No Conflict. The Company has all requisite corporate power and authority to enter into this Agreement, the Registration Rights Agreement, the New Warrants and the Revised Agreements (such agreements other than this Agreement are collectively referred to hereafter as the "Related Agreements") to issue and sell the Series G Preferred Shares and the New Warrants, and to carry out its obligations hereunder and under the Related Agreements. The execution, delivery and performance of this Agreement and the Related Agreements by the Company and the issuance and sale of the Series G Preferred Shares and the New Warrants by the Company have been duly and validly authorized by all requisite corporate proceedings on the part of the Company. This Agreement is, and the Related Agreements when executed and delivered by the Company will be, and when issued and sold each of the New Warrants will be, a valid and binding obligation of the Company, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium, rehabilitation, liquidation, conservatorship, receivership or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Subject to the receipt of the consents or approvals set forth in Section 3(b) of the disclosure schedule delivered by the Company to the Purchasers concurrently with the execution and delivery of this Agreement (the "Disclosure Schedule"), the execution and delivery of this Agreement and each Related Agreement by the Company do not, and the consummation by the Company of the transactions contemplated hereby and thereby will not, the issuance and sale of the Series G Preferred Shares and the New Warrants will not, and the performance by the Company of its obligations under the terms of the Preferred Shares and the New Warrants will not, result in or constitute: (i) a default, breach or violation of or under the Certificate of Incorporation or the By-laws of the Company, or (ii) a default, breach or violation of or under any mortgage, deed of trust, indenture, note, bond, license, lease agreement or other instrument or obligation to which the Company is a party or by which any of their properties or assets are bound, except for any defaults, breaches or violations which would not have, individually or in the aggregate, a Company Material Adverse Effect, or (iii) a violation of any statute, rule, regulation, order, judgment or decree of any court, public body or authority by which the Company or any of its properties or assets are bound, except for any violations which would not have, individually or in the aggregate, a Company Material Adverse Effect, or (iv) an event which (with notice or lapse of time or both) would permit any person to terminate, accelerate the performance required by, or accelerate the maturity of, any indebtedness or obligation of the Company under any agreement or commitment to which the Company is a party or by which the Company is bound or by which any of its properties or assets are bound, except for any accelerations or terminations which would not have, individually or in the aggregate, a Company Material Adverse Effect, or (v) the creation or imposition of any lien, charge or encumbrance on any property of the Company under any agreement or commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, except for any liens, charges or encumbrances which would not have, individually or in the aggregate, a Company Material Adverse Effect, or (vi) an event which would require any consent under any agreement to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, except for any consents which, if not received, would not have, individually or in the aggregate, a Company Material Adverse Effect. (c) Capitalization. The authorized capital stock of the Company consists of (i) 30,000,000 shares of Common Stock, par value $.01 per share, of which 7,958,786 shares (excluding shares held in treasury) are outstanding and 10,000,000 shares of preferred stock, par value $1.00 per share (the "Preferred Stock"), of which (i) 452,064 shares of Series A Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"), of which 452,064 shares are outstanding; (ii) 2,290,000 shares of Series B Preferred Stock, par value $1.00 per share, of which 2,290,000 shares are outstanding; (iii) 186,671 shares of Series D Preferred Stock, par value $1.00 per share, (the "Series D Preferred Stock"), of which 186,671 shares are outstanding; (iv) 1,444 shares of Series E Preferred Stock, of which 1,444 shares are outstanding; (v) 599 shares of Series F Preferred Stock, of which 599 shares are outstanding; (vi) 777 shares of Series G Preferred Stock, of which no shares are outstanding; and (vii) 2,026 shares of Series H Preferred Stock, of which 2,026 shares are outstanding. All of the outstanding shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series H Preferred Stock have been duly authorized and validly issued, and are fully paid and non- assessable. Immediately following the Closing, (i) 7,958,786 shares of Common Stock will be outstanding; (ii) 452,064 shares of Series A Preferred Stock will be outstanding; (iii) 2,290,000 shares of Series B Preferred Stock will be outstanding; (iv) no shares of Series C Preferred Stock will be outstanding; (v) 186,671 shares of Series D Preferred Stock will be outstanding; (vi) 1,444 shares of Series E Preferred Stock will be outstanding; (vii) 599 shares of Series F Preferred Stock will be outstanding; (viii) 777 shares of Series G Preferred Stock will be outstanding, and (ix) 2,026 shares of Series H Stock will be outstanding. Except for the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series H Preferred Stock, and except as set forth in Section 3(c) of the Disclosure Schedule, there are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon the Company for the purchase or acquisition of any shares of capital stock of the Company or any other securities convertible into, exchangeable for or evidencing the right to subscribe for any shares of such capital stock. The Company is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of the capital stock of the Company or any convertible securities, rights or options of the type described in the preceding sentence. The Company is not a party to, and does not have knowledge of, any agreement expressly restricting the transfer of any shares of the capital stock of the Company. (d) No Subsidiaries or Other Ventures. The Company has no subsidiaries. Except as set forth in Section 3(d)(i) of the Disclosure Schedule, the Company does not own, directly or indirectly, any interest in any corporation, partnership, joint venture, association or other entity. (e) Status of Shares. The Preferred Shares to be issued at the Closing have been duly authorized by all necessary corporate action on the part of the Company. When issued and paid for as provided in this Agreement, the Series G Preferred Shares will be validly issued and outstanding, fully paid and nonassessable, and the issuance of such Series G Preferred Shares is not and will not be subject to preemptive rights of any other stockholder of the Company. The shares of Common Stock to be issued upon conversion of the Series G Preferred Shares and upon exercise of the New Warrants have been duly authorized by all necessary corporate action on the part of the Company and, as of the Closing, will be duly reserved for issuance. When the shares of Common Stock are issued upon conversion of the Series G Preferred Shares and upon exercise of the New Warrants, such shares will be validly issued and outstanding, fully paid and nonassessable and the issuance of such shares will not be subject to preemptive rights of any other stockholder of the Company. (f) Financial Statements. (1) The Company has heretofore delivered or made available to the Purchaser the audited consolidated balance sheets at June 30, 1995, 1994 and 1993 of the Company and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended, including the related notes and auditor's report thereon (the "Financial Statements"). The Financial Statements (i) present fairly the consolidated financial condition of the Company at the dates thereof and present fairly its consolidated results of operations and cash flows for the years then ended and (ii) have been prepared in conformity with generally accepted accounting principles ("GAAP") applied consistently with respect to the immediately preceding fiscal year period except as set forth in the notes to the Financial Statements or in the auditor's report thereon. (2) The Company has heretofore delivered or made available to the Purchaser the unaudited consolidated balance sheet at December 31, 1995 of the Company (the "December Balance Sheet") and the related consolidated statements of income and cash flows for the three months then ended (such December Balance Sheet and related consolidated statements, collectively, the "December Financial Statements"), each of which (i) presents fairly, in all material respects, the consolidated financial condition of the Company at December 31, 1995, and presents fairly its consolidated results of operations and cash flows for the six months then ended and (ii) has been prepared in compliance with all of the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the applicable rules and regulations thereunder. (g) SEC Reports. The Company has filed all reports, statements, forms and documents with the Securities Exchange Commission ("SEC") that it was required to file since December 31, 1990 (the "SEC Reports"), all of which have complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act. As of their respective dates, each such report, statement, form or document, including without limitation any financial statements or schedules included therein, did not contain any untrue statement of a material fact or omit 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. (h) Liabilities. As of the date hereof, except (i) as set forth on the December Balance Sheet, (ii) as set forth in Section 3(h) of the Disclosure Schedule or (iii) for liabilities or obligations which were incurred after December 31, 1995 in the ordinary course of business and consistent with past practices, the Company has no liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a consolidated balance sheet of the Company (including the notes thereto) in conformity with GAAP. (i) Indebtedness of the Company. Section 3(i) of the Disclosure Schedule sets forth all outstanding secured and unsecured Indebtedness (as defined hereinafter) of the Company in excess of $50,000 in any individual case, or for which the Company has commitments, on the date of this Agreement. The Company is not in default with respect to any such Indebtedness. "Indebtedness" means at any time, (i) all indebtedness for borrowed money, (ii) all obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) all reimbursement obligations and other liabilities under letters of credit, (iv) all obligations to pay the deferred purchase price of property or services, other than normal trade creditors in the ordinary course, (v) all obligations in respect of capitalized leases, (vi) all guarantees and contractual obligations of the Company, contingent or otherwise, with respect to any indebtedness or obligation of another, and (vii) all obligations of the Company secured by any mortgage, pledge, lien, security interest or other encumbrance on any asset or property of the Company, whether or not such obligation has been assumed. (j) Title to Properties; Liens. The Company does not own any real property. Section 3(j) of the Disclosure Schedule correctly describes all real property leased by the Company, together with a description of the lease payment obligations and lease termination provisions relating thereto. The Company enjoys peaceful and undisturbed possession under all leases necessary in any material respect for the operation of its properties and assets, and all such leases are valid and subsisting and are in full force and effect. (k) Actions Pending. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against the Company which questions the validity of this Agreement or the Related Agreements or any action taken or to be taken pursuant hereto or thereto. There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company or any of its properties or assets. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company. (l) Compliance with Law. The business of the Company has been and is presently being conducted so as to comply with all applicable federal, state, and local governmental laws, rules, regulations and ordinances. The Company has all material franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of its business as now being conducted by it, and the Company is in compliance therewith except for any non- compliances which would not, individually or in the aggregate, have a Company Material Adverse Effect. (m) No Violations. Except as disclosed in Section 3(m) of the Disclosure Schedule, the Company is not in violation of or default under (i) any term of its Certificate of Incorporation or By-Laws, (ii) any of its contracts or agreements or under any instrument by which the Company is bound, or (iii) any outstanding indenture or other debt instrument or with respect to the payment of principal of or interest on any outstanding obligations for borrowed money. (n) Taxes. (i) The Company has duly and timely filed, or caused to be filed, and will duly and timely file, or cause to file, with the appropriate taxing authority all Tax Returns (as defined below) required to be filed on or before the date hereof by or with respect to the Company and such Tax Returns were or will be true, correct and complete in all material respects when filed. (ii) The Company has paid or caused to be paid in full or has made adequate provision for on its balance sheet all material Taxes (as defined below) shown to be due on such Tax Returns. There are no liens for Taxes upon the assets of either the Company except for statutory Liens for current Taxes not yet due. (iii) None of the Tax Returns filed by or on behalf of the Company has been examined by the appropriate taxing authorities. (iv) Except as set forth in Schedule 3(n)(iv) hereto, the Company has not received any notice of deficiency or assessment from any taxing authority with respect to liabilities or obligations for Taxes with respect to the Company which has not been fully paid or finally settled, and any such deficiency or assessment shown in Schedule 3(n)(iv) hereto is being contested in good faith through appropriate proceedings. The Company has not given any outstanding waivers or comparable consents extending the application of the statute of limitations with respect to any Taxes or Tax Returns with respect to the Company. (v) The Company has complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of payroll and employment taxes and have, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all material payroll and employment taxes required to be so withheld and paid over. (vi) No audit or other administrative proceeding or court proceeding which is material to the financial condition of Company is presently pending with regard to any Taxes or Tax Returns. (vii) The amount and character of the tax loss carryforwards as set forth in the Company's financial statements for the year ending June 30, 1995 are materially accurate and, to the Company's best knowledge, are not subject to any "Section 382 limitation" under Section 382 of the Code, and any regulations promulgated thereunder. To the Company's best knowledge, at the Closing Date, the issuance of the Preferred Shares, the Warrants and the Fee Warrants in accordance with the terms of this Agreement and the Related Agreements will not result in an "ownership change" under Section 382 of the Code, and any regulations promulgated thereunder. As of the Closing Date, the Company shall not have any plan or intention to take any action after the Closing Date, which to its best knowledge would result in an "ownership change" under Section 382 of the Code and any regulations promulgated thereunder. (viii) For purposes of this Agreement, "Taxes" shall mean any and all taxes, charges, fees, levies or other like assessments (and all related interest, additions to tax and penalties), including, but not limited to, income, transfer, gains, gross receipts, excise, inventory, property (real, personal or intangible), custom, duty, sales, use, license, withholding, payroll, employment, capital stock and franchise taxes, imposed by the United States, or any state, local or foreign taxing authority, whether computed on a unitary, combined or any other basis and "Tax Return" shall mean any report, return or other information filed with any taxing authority with respect to Taxes imposed upon or attributable to the operations of the Company. (o) ERISA. Section 3(o) of the Disclosure Schedule contains a true and complete list of each employee benefit plan, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any other bonus, severance or termination pay, stock option or stock purchase, incentive pay or other plan, program or arrangement covering present or former employees of the Company which is maintained or contributed to by the Company or any of its subsidiaries (the "Plans"). None of the Plans is subject to the provisions of Title IV of ERISA, and none of the Plans is a multiemployer Plan as defined in Section 3(37) of ERISA (a "Multiemployer Plan"). The Company has not incurred (directly or indirectly) any liability to the Pension Benefit Guaranty Corporation or with respect to a Multiemployer Plan. None of the Plans is subject to the minimum funding standards set forth in Section 302 of ERISA or Section 412 of the Internal Revenue Code of 1986, as amended (the "Code"). None of the Company or any of its officers or employees has engaged in a "prohibited transaction" as defined in Section 406 of ERISA or Section 4975 of the Code with respect to any Plan which would subject any of such parties to a civil penalty under Section 502(i) of ERISA or an excise tax under Section 4975 of the Code. Each of the Plans has been operated in all material respects in accordance with applicable law, including ERISA and the Code. None of the Plans is an employee welfare plan, as defined in Section 3(1) of ERISA, which provides health or life insurance benefits to employees of the Company following their retirement (other than coverage mandated by applicable law). Each Plan that is intended to be qualified under Section 401(a) of the Code is so qualified. (p) Absence of Specified Changes. Except as set forth in Section 3(p) of the Disclosure Schedule, during the period from June 30, 1995 to the date hereof, there has not been any: (1) material adverse change in the business, condition or results of operations of the Company; (2) transactions involving the Company except in the ordinary course of business; (3) change in accounting principles, methods or practices of the Company; (4) amendment to the Certificate of Incorporation or By-Laws of the Company; or (5) agreement or understanding to take any of the actions described above in this paragraph. (q) Certain Fees. No broker's, finder's or financial advisory fees or commissions will be payable by the Company with respect to the transactions contemplated by this Agreement and the Related Agreements. (r) Use of Proceeds. The Company will apply the proceeds from the sale of the Series G Preferred Shares and the New Warrants to general working capital purposes. (s) Intellectual Property Rights. (i) The Company is the owner of or has rights to use (including the right to sue for past infringement) the intellectual and similar property of every kind and nature used at any time in or necessary for the conduct of its business, including without limitation, (A) Patents (meaning all United States and foreign patents and patent applications, patent disclosures and inventions, and all patents issued upon said patent applications or based upon said disclosures and inventions, including all reissues, divisions, continuations, continuations- in-part, substitutions, extensions or renewals of any of the foregoing), (B) Trademarks (meaning all United States, any political subdivision thereof, and foreign trademarks, service marks, trade names, corporate names, company names, business names, fictitious business names, trade styles, logos, designs and general intangibles of like nature, all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office (the "PTO"), any State of the United States or any other country or jurisdiction or any political subdivision thereof, and all goodwill symbolized thereby and/or associated therewith and all extensions or renewals thereof,), (C) Copyrights (meaning all copyrights, United States and foreign copyright registrations, and applications to register copyrights), (D) inventions, formulae, processes, designs, know-how, show-how or other data or information, (E) confidential or proprietary technical and business information, processes and trade secrets, (F) computer software and databases (including all embodiments or fixations thereof and related documentation, registrations and franchises, and all additions, improvements, enhancements, updated and accessions thereto), (G) all technical manuals and documentation made or used in connection with any of the foregoing, and (H) all licenses and rights with respect to the foregoing or property of like nature, in each case as any of the foregoing have been at any time used in or necessary for the conduct of the business of the Company (collectively, the "Intellectual Property Rights"). (ii) Section 3(s)(ii) of the Disclosure Schedule sets forth a complete and accurate list of all Copyrights, Patents, and Trademarks owned by or under obligation of assignment to the Company. Each owner identified thereon is listed in the records of the appropriate United States, State or foreign agency as the sole owner of record. (iii) Section 3(s)(iii) of the Disclosure Schedule sets forth a complete and accurate list of (a) all material agreements and (b) all other agreements entered into since January 1, 1990, in each case between the Company and any third party granting any right to use or practice any rights under any Intellectual Property Right (collectively, the "Intellectual Property Licenses"), except for single-user licenses granting the right to use on a single personal computer a single copy of application software incorporating any of the Company's Intellectual Property Rights. (iv) There is no restriction or limitation on the right of the Company to transfer any of the Intellectual Property Rights. (v) No trade secret, formula, process, invention, design, know-how, show-how or any other confidential information relating to the Company's business has been disclosed or authorized to be disclosed to any third party unless any such third party has entered into, or is bound by, a confidentiality agreement that is sufficient to protect fully the Company's proprietary interest and right in and to such Intellectual Property Right. (vi) The use of the Intellectual Property Rights by the Company is not in conflict with the rights of others. There are no pending legal or governmental proceedings, including oppositions, interferences, proceedings or suits, relating to the Intellectual Property Rights, and, to the best knowledge of the Company, no such proceedings are threatened. To the best knowledge of the Company, the conduct of the business of the Company and the exercise of the Intellectual Property Rights does not infringe upon or otherwise violate, and the exercise of any rights granted to the Company under any Intellectual Property License would not infringe upon or violate any intellectual property rights of any third party. To the best knowledge of the Company, except as set forth in Section 3(s)(vi), no person is infringing upon or otherwise violating any of the Intellectual Property Rights. None of the Company or its affiliates has received notice of any claims, and there are no pending claims, of any persons relating to the scope, ownership or use of any of the Intellectual Property Rights. (vii) Each copyright registration, patent, and registered trademark and application therefor listed in Section 3(s)(ii) of the Disclosure Schedule is valid, subsisting and in proper form, and has been duly maintained, including the submission of all necessary filings in accordance with the legal and administrative requirements of the appropriate jurisdictions. There have been no failures in complying with such requirements. Except as provided in Section 3(s)(ii) of the Disclosure Schedule, no such Copyright, Patent or Trademark has lapsed and there has been no cancellation or abandonment thereof. (viii) With respect to each patent and patent application listed in Section 3(s) of the Disclosure Schedule, there are no defects of form in the preparation or filing of the applications thereof. Each pending application is being diligently prosecuted. During the prosecution of each Patent, (A) all pertinent prior art references known to the Company or its counsel was properly disclosed to the PTO, and (B) neither such counsel nor the Company made any misrepresentation to, or concealed any material fact from, the PTO. (ix) The execution and delivery of this Agreement and the Related Agreements and the taking of the actions contemplated hereby and thereby will not alter any of the rights of the Company in or to the Intellectual Property Rights. (t) Environmental Matters. The Company is in compliance with the provisions of all federal, state and local laws relating to pollution or protection of the environment applicable to it or to real property leased by it or to the use, operation or occupancy thereof, except for violations or liabilities which individually or in the aggregate could not reasonably be expected to have a Company Material Adverse Effect. The Company has not engaged in any activity in violation of any provision of any federal, state or local law relating to pollution or protection of the environment, which violation could reasonably be expected to have a Company Material Adverse Effect. The Company has no liability, absolute or contingent, under any federal, state or local law relating to pollution or protection of the environment, except for liabilities which individually or in the aggregate could not reasonably be expected to have a Company Material Adverse Effect. (u) Registration Rights. Except as set forth in Section 3(u) of the Disclosure Schedule, the Company is not a party to any agreement granting registration rights to any person with respect to any of its equity or debt securities. (v) Agreements. Section 3(v) of the Disclosure Schedule contains a list of each agreement or instrument (including any and all amendments thereto) to which the Company is a party as of the date hereof and which is or, immediately following the consummation of the transactions contemplated by this Agreement, will be, material to the business, condition or results of operations of the Company. Each such agreement or instrument (including any and all amendments thereto) is in full force and effect and constitutes a legal, valid and binding obligation of (i) the Company and (ii) to the best knowledge of the Company, the other respective parties thereto, and, to the best knowledge of the Company, no person is in default or breach of (with or without the giving of notice or the passage of time) any such agreement or instrument. (w) Availability of Documents. Section 3(w) of the Disclosure Schedule contains a true, correct and complete copy of the Company's Certificate of Incorporation, together with all amendments thereto. The Company has also heretofore provided or made available to the Purchaser an accurate copy of its by-laws and has heretofore made available for inspection by the Purchaser all written agreements, arrangements, commitments and documents referred to herein or in the Disclosure Schedule, in each case, together with all amendments and supplements thereto. The Company has heretofore made available for inspection by the Purchaser its corporate minute books. Such corporate minute books contain the minutes of all the meetings of stockholders, board of directors and any committees thereof which have been held since the Company's date of incorporation and all written consents to action executed in lieu thereof. (x) Business Relations. To the knowledge of the Company, no client, customer or supplier will cease to do business with the Company due to the consummation of the transactions contemplated by this Agreement or the Related Agreements. (y) Interest in Competitors, Suppliers, Customers, etc. Except as set forth on Section 3(y) of the Disclosure Schedule or with respect to the ownership of less than 1% of the outstanding publicly traded securities of an entity, neither the Company nor its officers, directors, or affiliates have any ownership interest in any competitor, supplier, customer or franchisee of the Company. (z) Private Offering. Assuming the accuracy of the Purchaser's representations set forth in Section 4(c) herein, the offer and sale of the Series G Preferred Shares and the New Warrants hereunder is exempt from the registration and prospectus delivery requirements of the Securities Act. Neither the Company nor any person acting on behalf of it has taken or will take any action which would subject the offering and issuance of any of such securities to the provisions of Section 5 of the Securities Act or to the provisions of any securities law, rule or regulation of any applicable jurisdiction. (aa) Disclosure. No representation or warranty to Purchaser contained in this Agreement and no statement contained in the Disclosure Schedule or any Officer's Certificate of the Company furnished pursuant to the provisions hereof, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein not misleading. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser represents and warrants, severally and not jointly, to the Company as follows: (a) Organization and Standing of the Purchasers. The Purchaser is a partnership duly organized, validly existing and in good standing (to the extent such concept exists) under the laws of the jurisdiction of its organization. (b) Authority; Enforceability; No Conflict. The Purchaser has all requisite power and authority (corporate or otherwise) to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by the Purchaser have been duly and validly authorized by all requisite partnership proceedings on the part of the Purchaser. This Agreement is a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium, rehabilitation, liquidation, conservatorship, receivership or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. The execution and delivery of this Agreement by the Purchaser do not, and consummation by the Purchaser of the transactions contemplated hereby will not, result in or constitute (i) a default, breach or violation of or under the organizational documents of the Purchaser, or (ii) a default, breach or violation of or under any mortgage, deed of trust, indenture, note, bond, license, lease agreement or other instrument or obligation to which the Purchaser is a party or by which any of its properties or assets are bound, except for any defaults, breaches or violations which would not, individually or in the aggregate, have a material adverse effect on the Purchaser or prevent or materially delay the consummation by the Purchaser of the transactions contemplated hereby, or (iii) a violation of any statute, rule, regulation, order, judgment or decree of any court, public body or authority, except for any violations which would not, individually or in the aggregate, have a material adverse effect on the Purchaser or prevent or materially delay the consummation by the Purchaser of the transactions contemplated hereby. (c) Acquisition for Investment. The Purchaser is either an "accredited investor," as that term is defined in SECTION230.501(a) of the rules and regulations promulgated by the SEC under the 1933 Act or a person described in SECTION230.506(b)(ii) of such rules and regulations. The Purchaser is acquiring the Series G Preferred Shares and the New Warrants solely for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, and has no present intention or plan to effect any distribution of such Series G Preferred Shares or the New Warrants. The Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Series G Preferred Shares and New Warrants. The Series G Preferred Shares and New Warrants may bear a legend to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON CERTAIN EXEMPTIONS FROM REGISTRATION THEREUNDER. THE SALE, PLEDGE, HYPOTHECATION OR OTHER TRANSFER OF SUCH SECURITIES IS SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS AND CERTAIN RESTRICTIONS AND CONDITIONS CONTAINED IN A CERTAIN SECURITIES PURCHASE AGREEMENT AND RELATED AGREEMENTS DATED AS OF MARCH 7, 1996. THE HOLDER OF THIS CERTIFICATE BY ACCEPTANCE HEREOF AGREES TO BE BOUND BY SUCH RESTRICTIONS AND CONDITIONS. A COPY OF THE SECURITIES PURCHASE AND EXCHANGE AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY." 5. CONDUCT OF BUSINESS OF THE COMPANY. Except as expressly contemplated by this Agreement or the Related Agreements, during the period from the date hereof through the Closing, the Company will conduct its operations according to its ordinary course of business and consistent with past practice, and the Company will use its best efforts to preserve intact its business organization, to keep available the services of its officers and employees and to maintain existing relationships with customers and others having business relationships with it. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Agreement or the Related Agreements or as set forth in Section 5 of the Disclosure Schedule, prior to the Closing, the Company will not, without the prior written consent of the Purchaser: (a) amend its Certificate of Incorporation or By-Laws; (b) (i) except in accordance with the existing terms of the convertible securities, warrants, options and other agreements disclosed on Section 3(c) of the Disclosure Schedule, authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any securities of any class, or (ii) amend in any respect any of the terms of any such securities outstanding as of the date hereof, except to the extent required by the express terms on the date hereof of such securities; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock, or property or any combination thereof) in respect of its capital stock (except for dividends on the existing preferred stock in accordance with its terms), or redeem, retire, repurchase or otherwise acquire, directly or indirectly, any of its securities or adopt a plan of complete or partial liquidation or resolutions providing for or authorizing any such liquidation; (d) incur any additional Indebtedness, except for short-term borrowings or other Indebtedness incurred in the ordinary course of business, or mortgage or pledge any of its assets, tangible or intangible; (e) acquire, sell, lease or dispose of any assets outside the ordinary course of business; (f) make any change in any of the accounting principles or practices, methods or practices or business policies used by it; (g) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (h) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business consistent with past practice or, in accordance with their terms, of liabilities reflected or reserved against in the September Balance Sheet (or the notes thereto) or incurred in the ordinary course of business consistent with past practice; (i) increase the compensation payable to the officers and employees of the Company, except for increases in salary or wages (a) in accordance with past practice or (b) in conjunction with promotions or other changes in job status in the ordinary course of business; (j) pay, loan or advance any amounts to, transfer or lease any properties or assets to or enter into any contract or agreement with any officers, directors, employees or shareholders of the Company, except with respect to directors' fees and compensation to officers and employees at rates in accordance with past practice, and except with respect to reimbursable business expenses of a nature and in amounts reasonably related to the requirements of the business of the Company; (k) waive or release any rights of material value or terminate or fail to renew any material contract; or (l) take, or agree in writing or otherwise to take, directly or indirectly, any of the actions described in Sections 5(a) through 5(k). 6. ADDITIONAL AGREEMENTS. (a) Access to Information; Confidentiality. From the date hereof to the Closing, the Company shall afford the officers, employees and agents of the Purchaser access during normal business hours to the Company's officers, employees, agents, properties, offices and all books and records of the Company, and shall furnish the Purchaser with all financial, operating and other data and information concerning the Company as the Purchaser, through its officers, employees or agents, may request and shall cooperate fully with the Purchaser and its representatives in their examination of the Company. The Purchaser will, and will cause its affiliates, partners, directors, officers, employees, agents, representatives and financial advisors (collectively, "Representatives") to, hold in strict confidence all Confidential Information (as hereinafter defined), and not disclose the same to any person without the prior consent of the Company, unless compelled to disclose any such Confidential Information by judicial or administrative process or, in the written opinion of their counsel, by other requirements of law. Prior to disclosing any Confidential Information to any such person, the Purchaser will inform such person and its representatives of the confidential nature thereof and will obtain from such person its agreement to be bound by the provisions of this paragraph as if references herein to the Purchaser were references to such person. If this Agreement is terminated, the Purchaser will promptly return to the Company or destroy all documents (including all copies thereof) furnished by the Company and received by the Purchaser or any of its Representatives containing such Confidential Information. For purposes hereof, "Confidential Information" shall mean all confidential nonpublic information concerning the Company that the Purchaser obtains from the Company, or its representatives, excluding any such information that subsequently becomes publicly available (other than directly or indirectly through acts of the Purchaser.) (b) Best Efforts. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Related Agreements as promptly as practicable. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement and the Related Agreements, the proper officers and directors of each party hereto shall take all such necessary action. (c) Public Announcements. The Purchaser and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement and the Related Agreements, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law. Except as may be required by applicable law, the Company shall not disclose the identify of the Purchaser in any such press release or other public statement without the prior written consent of the Purchaser. (d) Supplements to Disclosure Schedule. Prior to the Closing, the Company will supplement or amend the Disclosure Schedule with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedule. No supplement or amendment of the Disclosure Schedule made pursuant to this section shall be deemed to cure any breach of any representation or warranty made in this Agreement unless the Purchaser specifically agrees thereto in writing. (e) Directors. For so long as the Purchaser and its affiliates shall own, in the aggregate, Common Stock (or Preferred Stock convertible into Common Stock) equal to or exceeding five percent of the then outstanding Common Stock of the Company, the Purchaser and its affiliates shall be entitled to propose two candidates (the "Purchaser Designees") for election to the Board of Directors of the Company. Subject to its fiduciary duties to shareholders, the Company will recommend to its shareholders that the Purchaser Designees be elected to the Company's Board of Directors. 7. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL THE PREFERRED SHARES AND WARRANTS AND OF THE PURCHASERS TO PURCHASE THE PREFERRED SHARES AND WARRANTS. The respective obligations hereunder of the Company to issue and sell the Series G Preferred Shares and New Warrants and of the Purchaser to purchase the Series G Preferred Shares and New Warrants are subject to the satisfaction, at or before the Closing, of each of the following conditions set forth in paragraphs (a) through (c) below. (a) Consents. The consents and approvals set forth in Section 3(b) of the Disclosure Schedule shall have been obtained. (b) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (c) Related Agreements. The Related Agreements shall have been executed and delivered by the parties thereto. 8. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY TO SELL THE PREFERRED SHARES AND WARRANTS. The obligation hereunder of the Company to sell the Series G Preferred Shares and New Warrants to the Purchaser is further subject to the satisfaction, at or before the Closing, of each of the following conditions set forth in paragraphs (a) and (b) below. These conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion. (a) Accuracy of the Purchaser's Representations and Warranties. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing as though made at that time (except for representations and warranties that speak as of a particular date). (b) Performance by the Purchaser. The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing. 9. CONDITIONS PRECEDENT TO THE OBLIGATION OF THE PURCHASER TO PURCHASE THE PREFERRED SHARES AND WARRANTS. The obligation of the Purchaser hereunder to acquire and pay for the Series G Preferred Shares and New Warrants is subject to the satisfaction, at or before the Closing, of each of the following conditions set forth in paragraphs (a) through (e) below. These conditions are for the Purchaser's sole benefit and may be waived by the Purchaser at any time in its sole discretion. (a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing as though made at that time (except for representations and warranties that speak as of a particular date). (b) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing. (c) Legal Opinions. The Purchaser shall have received the opinion of Baer Marks & Upham, substantially in the form set forth in Exhibit V hereto. (d) Compliance with Securities Laws. The offering and sale by the Company, at or prior to the Closing, of the Series G Preferred Shares and New Warrants shall have been made in compliance with all applicable requirements of federal and state securities laws and each Purchaser shall have received evidence thereof in form and substance reasonably satisfactory to it. (e) No Offerings. Neither the Company nor any of its subsidiaries shall have offered, placed or sold, or caused or agreed to be offered, placed or sold, any securities or other obligations other than as part of the contemplated sale of the Series G Preferred Shares and New Warrants and the capital structure as reflected herein. (f) Regulatory Approvals. All regulatory approvals shall have been obtained by the Purchaser. 10. TERMINATION. (a) Right To Terminate. Notwithstanding anything to the contrary set forth in this Agreement, this Agreement may be terminated and the transactions contemplated herein abandoned at any time prior to the Closing: (i) at any time by mutual written consent of the Company and the Purchaser; (ii) by either the Company or the Purchaser if the Closing shall not have occurred by April 1, 1996; provided, however, that the right to terminate this Agreement under this Section 10(a)(ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (iii) by either the Company or the Purchaser if a court of competent jurisdiction shall have issued an order, decree or ruling permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable. (b) Obligations to Cease. In the event that this Agreement shall be terminated pursuant to Section 10(a) hereof, all obligations of the parties hereto under this Agreement shall terminate and there shall be no liability of any party hereto to any other party except that (i) the provisions of the second paragraph of Section 6(a), Section 11, and Section 12(g) shall survive, and shall be and remain in full force and effect and (ii) nothing herein will relieve any party from liability for any willful breach of this Agreement. 11. INDEMNIFICATION. (a) General Indemnity. The Company agrees to indemnify and save harmless the Purchaser (and its directors, officers, partners, affiliates, representatives, advisors, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, interest, penalties, reasonable attorneys' fees, charges and disbursements) incurred by the Purchaser as a result of (i) any breach of the representations, warranties or covenants made by the Company herein or in the Related Agreements or (ii) any action, proceeding or claim commenced or threatened by a third party in connection with this Agreement, the Related Agreements and the transactions contemplated hereby and thereby. The Purchaser agrees to indemnify and save harmless the Company (and its directors, officers, partners, affiliates, representatives, advisors, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, interest, penalties, reasonable attorneys' fees, charges and disbursements) incurred by the Company as a result of any breach of the representations, warranties or covenants made by the Purchaser herein or in the Related Agreements. No party shall be entitled to indemnification hereunder unless and until the aggregate amount of such party's indemnification claims exceeds $15,000 and then to the full extent of such claims. (b) Indemnification Procedure. Any party entitled to indemnification under this Section 11 (an "indemnified party") will give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification promptly after the discovery by such party of any matters giving rise to a claim for indemnification; provided that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 11 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an indemnified party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying party may exist in respect of such action, proceeding or claim, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified party. In the event that the indemnifying party advises an indemnified party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the indemnified party may, at its option, defend, settle or otherwise compromise or pay such action or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the indemnified party's costs and expenses arising out of the defense, settlement or compromise of any such action, claim or proceeding shall be losses subject to indemnification hereunder. The indemnified party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the indemnified party which relates to such action or claim. The indemnifying party shall keep the indemnified party fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action or claim, then the indemnified party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. Anything in this Section 11 to the contrary notwithstanding, the indemnifying party shall not, without the indemnified party's prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the indemnified party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the indemnified party of a release from all liability in respect of such claim. The indemnification required by this Section 11 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the indemnified party against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 12. MISCELLANEOUS. (a) Brokers. The Company and the Purchaser represent and warrant to each other that they have not taken any action which will result in any liability of the other to pay any broker's or finder's fee with respect to this Agreement or the transactions contemplated hereby. (b) Expenses. Each party hereto shall pay its own fees and expenses incurred in connection with this Agreement except that, simultaneously with the closing of the purchase of the Series G Preferred Shares, the Company shall pay the reasonable out-of-pocket fees and expenses, up to a maximum amount of $10,000, incurred by the Purchaser in connection with this Agreement, the Related Agreements and the transactions contemplated hereby and thereby, including the reasonable fees and expenses of Skadden, Arps, Slate, Meagher & Flom in its capacity as Purchasers' legal counsel. (c) Survival of Representations, Warranties and Covenants. The representations and warranties set forth herein shall survive the Closing until sixty days after the Company shall have delivered to the Purchaser the audited financial statements of the Company and its consolidated subsidiaries (if any) for the fiscal year ended June 30, 1997, certified by the Company's independent public accountants; provided that the representations and warranties shall survive such date to the extent written notice of any breach thereof is given on or prior to such date and representations and warranties relating to Taxes shall survive until a date which is six months after the expiration of the applicable statute of limitations. The covenants of the Company set forth herein shall endure for so long as the Purchaser shall continue as a stockholder of the Company or for such shorter period as may be specified herein. (d) Assignment and Binding Effect. Neither the Company nor the Purchaser shall assign all or any part of this Agreement without the prior written consent of the other; provided, however, that the Purchaser, without such prior written consent, may assign its rights hereunder to any entity or entities directly or indirectly controlled by, or under common control with, it; provided, further, that no such assignment shall relieve the Purchaser of its obligations under this Agreement. This Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties pursuant to this paragraph. (e) Headings. Subject headings are included for convenience only and shall not affect the interpretation of any provisions of this Agreement. (f) Notices. Any notice, demand, request, waiver, or other communication under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if personally served or on the third day after mailing if mailed to the party to whom notice is to be given, by first class mail, registered, return receipt requested, postage prepaid and addressed as follows: To the Company: Nestor, Inc. One Richmond Square Providence, Rhode Island 02906 Attention: Chief Executive Officer With copies to: Baer Marks & Upham 805 Third Avenue New York, NY 10022-7513 Attention: Herbert S. Meeker, Esq. To the Wand (Nestor) Inc. Purchaser: c/o Wand Partners Inc. 630 Fifth Avenue Suite 2435 New York, New York 10111 Attention: Bruce W. Schnitzer With a copy to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10022-3897 Attention: Nancy L. Henry, Esq. (g) Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF DELAWARE AS APPLIED TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY IN THE STATE OF DELAWARE. (h) Entire Agreement. This Agreement, including the Exhibits and Schedules hereto, sets forth the entire understanding and agreement of the parties hereto relating to the matters set forth herein and supersedes any and all other understandings, negotiations or agreements between the parties hereto relating to the matters set forth herein. (i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute a single agreement. (j) Severability. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable, the same shall not affect any other provision of this Agreement, but this Agreement shall be construed in a manner which, as nearly as possible, reflects the original intent of the parties. (k) Words in Singular and Plural Form. Words used in the singular form in this Agreement shall be deemed to import the plural, and vice versa, as the sense may require. (l) Amendment and Modification. This Agreement may be amended or modified only by written agreement executed by all parties hereto. (m) Waiver. At any time prior to the Closing, any party hereto may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party granting such waiver but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or future failure. (n) Specific Enforcement. The Purchaser and the Company acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they may be entitled at law or equity. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. NESTOR, INC. By: /s/ David Fox Name: David Fox Title: President and Chief Executive Officer WAND/NESTOR INVESTMENTS L.P. By: WAND (NESTOR) INC. as General Partner By: /s/ Malcolm P. Appelbaum Name: Malcolm P. Appelbaum Title: Vice President SCHEDULE I SECURITIES TO BE PURCHASED BY WAND/NESTOR INVESTMENTS L.P. Security Purchase Price 777 Shares of Series G $777,000 Preferred Stock (together with detachable Warrants to purchase 225,330 shares of Common Stock) EX-99 3 EXHIBIT 2 EXHIBIT 2 NESTOR, INC. AMENDMENT NO. 1 dated as of March 7, 1996 to AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT Dated as of January 31, 1996 The undersigned parties, in consideration of the agreements herein set forth and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, hereby agree to the following amendments to the Amended and Restated Registration Rights Agreement dated as of January 31, 1996 (the "Nestor Registration Rights Agreement"): 1. As used in the Nestor Registration Rights Agreement, the term "Series G Preferred Stock" shall mean the 777 shares of Series G Convertible Preferred Stock par value $1.00 per share of the Company created pursuant to the Amended Certificate of Powers, Designations, Preferences and Special Rights filed March 6, 1996 with the Secretary of State of the State of Delaware. 2. The following defined term is added to Section 3 of the Nestor Registration Rights Agreement: March 7 1996 Securities Purchase Agreement: The Securities Purchase Agreement, dated as of March 7, 1996, by and between the Company and the Wand/Nestor I Partnership. 3. The term "Warrants" is deleted from Section 3 of the Nestor Registration Rights Agreement and is replaced in its entirety by the following term: Warrants: The Common Stock Purchase Warrants of the Company issued (a) to the Wand/Nestor I Partnership and the Wand/Nestor II Partnership pursuant to the Securities Purchase Agreement and the Revised Standby Agreement (and any Warrants issued in substitution or transfer thereof), (b) to Wand Partners L.P. and Hill & Partners in connection with the Letter of Engagement (and any Warrants issued in substitution or transfer thereof), (c) to the Wand/Nestor I Partnership, the Wand/Nestor II Partnership and the Wand/Nestor III Partnership pursuant to the Purchase and Exchange Agreement (and any Warrants issued in substitution or transfer thereof), and to the Wand/Nestor I Partnership pursuant to the March 7, 1996 Securities Purchase Agreement (and any Warrants issued in substitution or transfer thereof). 4. Except as herein amended, all terms, provisions and conditions of the Nestor Registration Rights Agreement shall continue in full force and effect and shall remain enforceable and binding in accordance with their terms. 5. This Amendment No. 1 may be executed in any number of identical counterparts, each of which shall for all purposes be deemed an original and all of which constitute, collectively, one agreement. 6. This Amendment No. 1 shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, effective as of the date and year first above written. NESTOR, INC. By:/s/ David Fox Name: David Fox Title: President WAND/NESTOR INVESTMENTS L.P. By: Wand (Nestor) Inc. as general partner By:/s/ Malcolm P. Appelbaum Name: Malcolm P. Appelbaum Title: Vice President WAND/NESTOR INVESTMENTS II L.P. By: Wand (Nestor) Inc. as general partner By: /s/ Malcolm P. Appelbaum Name: Malcolm P. Appelbaum Title: Vice President WAND/NESTOR INVESTMENTS III L.P. By: Wand (Nestor) Inc. as general partner By:/s/ Malcolm P. Appelbaum Name: Malcolm P. Appelbaum Title: Vice President WAND PARTNERS L.P. By: Wand Partners Inc. as general partner By:/s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman HILL & PARTNERS By:/s/ Thomas F. Hill Name: Thomas F. Hill Title: EX-99 4 EXHIBIT 3 EXHIBIT 3 NESTOR, INC. AMENDED CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND SPECIAL RIGHTS OF SERIES G CONVERTIBLE PREFERRED STOCK PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE * * * * * * Nestor, Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Company, by action taken on March 5, 1996, adopted the following resolution, which resolution remains in full force and effect as of the date hereof; WHEREAS, the Company filed a Certificate of Powers, Designations, Preferences and Special Rights with the Secretary of State of the State of Delaware on January 30, 1996, designating 401 shares of the Company's authorized preferred stock as "Series G Convertible Preferred Stock"; and WHEREAS, none of the shares of the Series G Convertible Preferred Stock have been issued; and WHEREAS, it is the desire of the Board of Directors, pursuant to its aforesaid authority, to amend the terms of the Series G Convertible Preferred Stock; NOW, THEREFORE, BE IT RESOLVED, that the Company's Certificate of Powers, Designations, Preferences and Special Rights of the Series G Convertible Preferred Stock is hereby amended and restated, to have the terms and provisions set forth below: Designation, Amount and Rank. Seven hundred seventy- seven (777) shares of a convertible preferred stock, $1.00 par value per share, shall constitute a series of such preferred stock designated as "Series G Convertible Preferred Stock" (the "Series G Preferred Stock"). With respect to dividend rights, redemption rights and rights on liquidation, winding up and dissolution, the Series G Preferred Stock shall rank pari passus with the Series F Preferred Stock and shall rank prior to the Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series H Preferred Stock, the Common Stock and any other class of capital stock or series of preferred stock hereafter created. The Series G Preferred Stock shall be issued pursuant to the following additional terms and conditions: 1. Series G Preferred Stock. 1.1. Definitions. As used herein, unless the context otherwise requires, the following terms have the following meanings: 1.1.1. "Additional Director" means any director whom holders of shares of Series F Preferred Stock and Series G Preferred Stock shall be entitled to elect by virtue of the provisions of Section 1.4.2 hereof. 1.1.2. "Additional Shares of Common Stock" means all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Sections 1.7.3 or 1.7.4, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company other than (a) the issuance of shares upon conversion of the Preferred Stock; (b) shares issued upon the exercise of the Currently Outstanding Warrants; (c) shares issued upon the exercise of the Warrants; (d) shares to be issued pursuant to Company sponsored employee benefit and compensation arrangements, but not to exceed 2,000,000 (subject to equitable adjustment in the event of any combination, reclassification, stock split, dividend or recapitalization of the Company); and (e) such additional number of shares, if any, as may become issuable upon the conversion or exercise of any of the securities referred to in the foregoing clauses (a) through (d) and by reason of adjustments required pursuant to anti-dilution provisions applicable to such Preferred Stock as in effect on the date hereof, but only if and to the extent that such adjustments are required as the result of the original issuance of such Series F Preferred Stock. 1.1.3. "Book Value Event" means the end of any fiscal quarter of the Company if the fully diluted book value per share of Common Stock of the Company determined in accordance with generally accepted accounting principles exceeds $.70. 1.1.4. "Business Day" means any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the City of New York are authorized by law or other governmental action to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. 1.1.5. "Common Stock" means the Company's Common Stock, $.01 par value, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. 1.1.6. "Conversion Price" means (a) $1.25, subject to adjustment pursuant to Sections 1.7 and 1.9 hereof or (b) if the Company has not on or before July 31, 1996 entered into a definitive agreement with a party with which it is currently negotiating, such agreement to contemplate an ongoing revenue stream to the Company, based on commercial exploitation of the Company's fraud detection technology or intelligent character recognition technology, and to require a non-refundable payment to the Company upon execution of at least $500,000 (if the transaction involves the Company's fraud detection technology), or $1.2 million (if the transaction involves the Company's intelligent character recegnition technology), any such payment to be not primarily in consideration of any requirement that the Company render services, then the Conversion Price shall automatically be reduced to $.75, subject to adjustment pursuant to Sections 1.7 and 1.9 hereof. For purposes of this paragraph 1.1.6, any prepaid royalty relating to the use of the Company's fraud-detection technology shall not be deemed to be a refundable payment. 1.1.7. "Convertible Securities" means any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for additional shares of Common Stock. 1.1.8. "Current Market Price" means on any date specified herein, the average daily Market Price during the period of the most recent twenty (20) days, ending on such date, on which the national securities exchanges were open for trading, except that if no Common Stock is then listed or admitted to trading on any national securities exchange or quoted in the over-the- counter market, the Current Market Price shall be the Market Price on such date. 1.1.9. "Currently Outstanding Warrants" means the common stock purchase warrants and non-qualified options listed below for the purchase of an aggregate of 3,315,650 shares (subject to adjustment as provided in such Warrants) of the Common Stock (based on the current capitalization of the Company): (A) Outstanding warrants to Purchase 689,375 shares of the Common Stock of the Company at $3.00 per share expiring at various times in 1996; (B) Other outstanding warrants and non- qualified options to purchase 206,000 shares of the Common Stock of the Company at prices between $1.00 per share and $4.625 per share expiring in 1996, 1997 and 1999; (C) Warrant No. W-D, dated August 11, 1994, respecting 210,000 shares of Common Stock; (D) Warrant No. W-F, dated August 11, 1994, respecting 15,000 shares of Common Stock; (E) Warrant No. W-G, dated August 11, 1994, respecting 15,000 shares of Common Stock; (F) Warrant No. W-H, dated August 11, 1994, respecting 5,000 shares of Common Stock; (G) Warrant No. W-I, dated August 11, 1994, respecting 5,000 shares of Common Stock; (H) Warrant No. W-E, dated August 11, 1994, respecting 130,000 shares of Common Stock; (I) Warrant No. W-J, dated August 11, 1994, respecting 15,000 shares of Common Stock; (J) Warrant No. W-K, dated August 11, 1994, respecting 5,000 shares of Common Stock; (K) Warrant No. W-N, dated October 5, 1995, respecting 928,000 shares of Common Stock; (L) Warrant No. W-O, dated October 5, 1995, respecting 72,000 shares of Company Common Stock; (M) Warrant No. W-P, dated August 11, 1994, respecting 215,000 shares; (N) Warrant No. W-Q, dated October 5, 1995, respecting 649,600 shares of Company Common Stock; (O) Warrant No. W-R, dated October 5, 1995, respecting 50,400 shares of Company Common Stock; and (P) Warrants to purchase 105,275 shares of Common Stock at an exercise price of $2.00 per share, expiring September 1998. 1.1.10. "Dividend Payment Date" means March 31, June 30, September 30 and December 31 of each year, commencing March 31, 1996. 1.1.11. "Dividend Period" means each of the periods commencing January 1 and ending March 31 of any year, commencing April 1 and ending June 30 of any year, commencing July 1 and ending September 30 of any year and commencing October 1 and ending December 31 of any year. 1.1.12. "Four-Dividend Default" means any time when the Company is in default in the payment of cash dividends on the Series F Preferred Stock and Series G Preferred Stock for any four (4) consecutive Dividend Periods occurring after the date on which the Restricted Period ends or for any four Dividend Periods within any eight (8) consecutive Dividend Periods after such date. 1.1.13. "Lender Default" means any time when (i) the Company shall violate the provisions of or be in default under the terms of any loan or other agreement relating to indebtedness of the Company or its subsidiaries or (ii) a judgement shall be entered against the Company or any of its subsidiaries, in an amount exceeding $50,000 for failure to pay trade creditors or indebtedness and such judgment shall remain unpaid for more than sixty days. 1.1.14. "Mandatory Redemption Date" means the Mandatory Redemption Date stated in Section 1.5.2 hereof. 1.1.15. "Market Price" means on any date specified herein, the amount per share of the Common Stock, equal to (a) the last sale price of such Common Stock, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted to trading, or (b) if such Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security by the NASD, the last trading price of the Common Stock on such date, or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (d) if such Common Stock is not then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the value as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company (and approved by the holders of a majority of the outstanding shares of Series F Preferred Stock and Series G Preferred Stock) as of the last day of any month ending within thirty (30) days preceding the date as of which the determination is to be made. 1.1.16. "Options" means rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. 1.1.17. "Other Securities" means any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holders of Preferred Stock at any time shall be entitled to receive, or shall have received, upon the conversion of Preferred Stock, 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. 1.1.18. "Person" means a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. 1.1.19. "Preferred Stock" means, collectively, the Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock. 1.1.20. "Redemption Date" means any date fixed for redemption of shares of Series F Preferred Stock and Series G Preferred Stock pursuant to the provisions of Section 1.5 hereof. 1.1.21. "Redemption Notice" means the written notice of redemption contemplated by Section 1.5.5 hereof. 1.1.22. "Restricted Period" shall mean the period beginning on the date of original issue of any shares of Series G Preferred Stock and ending on September 30, 1997. 1.1.23. "Securities Act" means the Securities Act of 1933, as amended. 1.1.24. "Series A Preferred Stock" means the Series A Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed August 30, 1990 with the Secretary of State of the State of Delaware. 1.1.25. "Series B Preferred Stock" means the Series B Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed June 10, 1992 with the Secretary of State of the State of Delaware. 1.1.26. "Series D Preferred Stock" means the Series D Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed August 9, 1995 with the Secretary of State of the State of Delaware. 1.1.27. "Series E Preferred Stock" means the Series E Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed January 30, 1996 with the Secretary of State of the State of Delaware. 1.1.28. "Series F Preferred Stock" means the Series F Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed January 30, 1996 with the Secretary of State of the State of Delaware. 1.1.29. "Series G Preferred Stock" means the Series G Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to the Amended Certificate of Designation filed March 6, 1996 with the Secretary of State of the State of Delaware. 1.1.30. "Series H Preferred Stock" means the Series H Convertible Preferred Stock, $1.00 par value, of the Company created pursuant to a Certificate of Designation filed January 30, 1996 with the Secretary of State of the State of Delaware. 1.1.31. "Special Redemption Event" has the meaning set forth in Section 1.5.3. 1.1.32. "Special Series G Voting Rights" means the special voting rights which holders of the Series G Preferred Stock are entitled to exercise by virtue of the provisions of Section 1.4.2 hereof. 1.1.33. "Stated Value" per share means (i) with respect to the Series A Preferred Stock, two dollars ($2.00), (ii) with respect to the Series B Preferred Stock, one dollar ($1.00), (iii) with respect to the Series D Preferred Stock, one dollar and fifty cents ($1.50), (iv) with respect to the Series E Preferred Stock, One Thousand Dollars ($1,000) plus all accumulated and unpaid dividends, if any, added thereto and minus all amounts paid in cash in respect of such previously accumulated and unpaid dividends that were originally added to Stated Value, (v) with respect to the Series F Preferred Stock, One Thousand Dollars ($1,000) plus all accumulated and unpaid dividends, if any, added thereto pursuant to Section 1.2.2 and minus all amounts paid in cash in respect of such previously accumulated and unpaid dividends that were originally added to such Stated Value pursuant to Section 1.2.2., (vi) with respect to the Series G Preferred Stock, One Thousand Dollars ($1,000) plus all accumulated and unpaid dividends, if any, added thereto pursuant to Section 1.2.2 and minus all amounts paid in cash in respect of such previously accumulated and unpaid dividends that were originally added to such Stated Value pursuant to Section 1.2.2, and (vii) with respect to the Series H Preferred Stock, One Thousand Dollars ($1,000) plus all accumulated and unpaid dividends, if any, added thereto and minus all amounts paid in cash in respect of such previously accumulated and unpaid dividends that were originally added to Stated Value. 1.1.34. "Two-Dividend Default" means any time when the Company is in default in the payment of cash dividends on the Series F Preferred Stock and the Series G Preferred Stock for any two (2) consecutive Dividend Periods occurring after the date on which the Restricted Period ends or for any two Dividend Periods within any six (6) consecutive Dividend Periods occurring after such date. 1.1.35. "Unpaid Dividends" means all dividends with respect to the Series F Preferred Stock and Series G Preferred Stock which have accrued but which have not been either paid in cash or added to the Stated Value thereof pursuant to Section 1.2.2. 1.1.36. "Warrants" means common stock purchase warrants to acquire an aggregate of 399,040 shares (subject to adjustment as provided in such warrants) issued in connection with the purchase of the Series G Preferred Stock and Series F Preferred Stock. 1.2. Dividends. 1.2.1. The holder of each issued and outstanding share of Series F Preferred Stock and the Series G Preferred Stock shall be entitled to receive, out of the funds of the Company legally available for such purpose, when, as and if declared by the Board of Directors of the Company, before any dividend shall be declared, paid or set aside, or any other distribution shall be declared or made, upon the Common Stock or any other class or series of stock of the Company, dividends in cash at a dividend rate of nine percent (9.0%) per annum of the Stated Value per share of Series F Preferred Stock and Series G Preferred Stock, calculated on a daily basis, for each Dividend Period or portion thereof during which such Series F Preferred Stock and Series G Preferred Stock are outstanding. Notwithstanding the foregoing, the Company may pay dividends in the form of Common Stock (with fractional shares to be paid in cash) pursuant to the terms of the Series D Preferred Stock. 1.2.2. Notwithstanding anything to the contrary herein provided, in the event that any portion of the quarterly dividend for a Dividend Period on the Series F Preferred Stock and Series G Preferred Stock is not declared and paid in cash on any Dividend Payment Date, the amount of such accrued dividend which is not so paid shall be accumulated and shall automatically be added to the Stated Value of such share on such date. Accumulated dividends on shares of Series F Preferred Stock and Series G Preferred Stock that have previously been added to the Stated Value thereof pursuant to the terms hereof may not thereafter be paid in cash except upon redemption by the Company. Unpaid dividends shall not bear interest but, to the extent accumulated and added to the Stated Value, shall continue to accrue dividends on a daily basis. Accumulated dividends on any share of Series F Preferred Stock and Series G Preferred Stock which are added to the Stated Value thereof pursuant to the terms hereof shall not be deemed to be in arrears for any purpose whatsoever. Any dividends that have accrued on the Series F Preferred Stock and Series G Preferred Stock but have not yet been added to the Stated Value thereof shall constitute Unpaid Dividends. Notwithstanding anything to the contrary herein provided, no cash dividends shall be paid with respect to the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock or the Series H Preferred Stock at any time when there are Unpaid Dividends with respect to the Series F Preferred Stock and the Series G Preferred Stock. 1.2.3. Dividends payable with respect to the Series F Preferred Stock and the Series G Preferred Stock shall be calculated on the basis of a 360-day year consisting of twelve (12) months of thirty (30) days each and shall be payable on each Dividend Payment Date to the holders of record of the Series F Preferred Stock and the Series G Preferred Stock at the close of business on the date specified by the Board of Directors of the Company; provided, however, that no such record date shall be more than thirty (30) days nor less than ten (10) days prior to the respective Dividend Payment Date. Dividends on shares of Series F Preferred Stock and the Series G Preferred Stock shall accrue from the date of original issue of such shares of Series F Preferred Stock or Series G Preferred Stock. Such dividends will accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The date on which the Company originally issues any share of Series F Preferred Stock or Series G Preferred Stock will be deemed to be its "date of original issue" regardless of the number of times transfer of such share is made on the stock records maintained by or for the Company. 1.2.4. All dividends paid or added to Stated Value, as the case may be, with respect to shares of the Series F Preferred Stock or Series G Preferred Stock shall be paid or added to Stated Value, as the case may be, ratably (based on the respective Stated Values plus Unpaid Dividends of the Series F Preferred Stock and Series G Preferred Stock) with respect to such shares to the holders entitled thereto. 1.2.5. So long as any shares of the Series F Preferred Stock or Series G Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend or other distribution on any of the Company's Common Stock, or Preferred Stock (other than the Series F Preferred Stock, Series G Preferred Stock, Series E Preferred Stock and Series H Preferred Stock) or make any payment on account of, or set apart for payment money for a sinking fund or other similar fund for the purchase, redemption or other retirement of, any of the Common Stock, or Preferred Stock (other than the Series F Preferred Stock or Series G Preferred Stock) or any warrants, rights, calls or options exercisable for any of the Common Stock or make any distribution in respect thereof, either directly or indirectly, and whether in cash, obligations or shares of the Company or other property (other than distributions or dividends in stock to the holders of such stock), and shall not permit any Person directly or indirectly controlled by the Company to purchase or redeem any of the Common Stock or Preferred Stock (other than the Series F Preferred Stock and Series G Preferred Stock) or any warrants, rights, calls or options exercisable for any of the Common Stock, unless prior to or concurrently with such declaration, payment, setting apart for payment, purchase or distribution, as the case may be, all funds then required for the mandatory redemption of shares of the Series F Preferred Stock and Series G Preferred Stock pursuant to Section 1.5.2 hereof, shall have been paid or be paid, and all Unpaid Dividends on shares of the Series F Preferred Stock and Series G Preferred Stock not paid in cash, shall have been paid in cash or be paid in cash. Notwithstanding the foregoing, the Company may declare and pay dividends in the form of Common Stock (with fractional shares to be paid in cash) pursuant to the terms of the Series D Preferred Stock. 1.3. Rights on Liquidation, Dissolution or Winding-Up. 1.3.1. In the event of any liquidation, dissolution or winding-up of the Company (including, without limitation, a liquidation or reorganization under Chapter 7 or 11 of Title 11 of the United States Code, as amended), the holders of shares of the Series F Preferred Stock and Series G Preferred Stock then issued and outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of Common Stock or of shares of any other class or series of stock of the Company, an amount equal to the Stated Value per share, plus an amount equal to any Unpaid Dividends to and including the date of distribution with respect to such shares. If, upon any liquidation, dissolution or winding-up of the Company (including, without limitation, a liquidation or reorganization under Chapter 7 or 11 of Title 11 of the United States Code, as amended), the assets of the Company available for distribution to its stockholders shall be insufficient (a "Liquidation Insufficiency") to pay the holders of shares of the Series F Preferred Stock and the Series G Preferred Stock the full amounts to which they shall respectively be entitled, the holders of shares of the Series F Preferred Stock and the Series G Preferred Stock shall be entitled to receive all the assets of the Company available for distribution and each such holder of shares of the Series F Preferred Stock and the Series G Preferred Stock shall share in any distribution in the proportion which the aggregate Stated Values of the shares of the Series F Preferred Stock (plus all Unpaid Dividends thereon) and the Series G Preferred Stock (plus all Unpaid Dividends thereon) held by such holder of the Series F Preferred Stock or Series G Preferred Stock bears to the aggregate Stated Values of all shares of the Series F Preferred Stock (plus all Unpaid Dividends thereon) and Series G Preferred Stock (plus all Unpaid Dividends thereon) then outstanding. If there is no Liquidation Insufficiency and payment shall have been made to the holders of shares of the Series F Preferred Stock and Series G Preferred Stock of the full amount to which they shall be entitled, then the holders of shares of the Series F Preferred Stock and Series G Preferred Stock shall be entitled to receive no further distributions thereon and the holders of shares of the Series A Preferred Stock, the Series E Preferred Stock and the Series H Preferred Stock shall be entitled to receive an amount equal to the Stated Value (plus all Unpaid Dividends thereon) per share thereof. After payment shall have been made to the holders of shares of the Series A Preferred Stock, the Series E Preferred Stock and the Series H Preferred Stock of the full amounts to which they shall be entitled, the holders of shares of the Common Stock and of shares of any other class of stock of the Company, if any, shall be entitled to share, according to their respective rights and preferences, in all remaining assets of the Company available for distribution to its stockholders. 1.4. Voting Power. 1.4.1. Except as otherwise expressly provided herein or as required by law, (i) each holder of Series G Preferred Stock shall be entitled to vote on all matters as to which stockholders of the Company are entitled to vote, and (ii) each holder of Series G Preferred Stock shall be entitled to cast a number of votes equal to the greatest number of whole shares of Common Stock into which such holder's shares of Series G Preferred Stock could be converted, pursuant to the provisions of Section 1.6 hereof, at the record date for the determination of stockholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. Except as otherwise expressly provided herein or as required by law, the holders of shares of Series B Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock and Common Stock shall be entitled to vote together as a class with respect to all matters as to which such stockholders of the Company are entitled to vote. 1.4.2. In the event that at any time there shall occur a Two-Dividend Default, then immediately upon the happening of such Two-Dividend Default and until such Two-Dividend Default and all defaults in the payment of quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock subsequent to and occurring while such Two-Dividend Default exists shall be cured, the number of directors constituting the Board of Directors of the Company shall, without further action, be increased by two and the holders of Series F Preferred Stock and Series G Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting together separately as a single class, to elect two directors of the Company to fill such newly created directorship, the remaining directors to be elected by the class or classes of stock (including the Series F Preferred Stock and Series G Preferred Stock) entitled to vote therefor, at each meeting of stockholders held for the purpose of electing directors. In the event that at any time there shall occur a Four- Dividend Default or a Lender Default, then immediately on the happening of such Four-Dividend Default or Lender Default and until such Lender Default or Four-Dividend Default and all defaults in the payment of quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock subsequent to and occurring while such Four-Dividend Default exists shall be cured, then the number of directors constituting the Board of Directors of the Company shall, without further action, be further increased by four in the case of a Four Dividend Default or in the case of a Lender Default, and the holders of Series F Preferred Stock and Series G Preferred Stock shall have, in addition to the other voting rights set forth herein, the exclusive right, voting together separately as a single class, to elect directors of the Company to fill such newly created directorships, the remaining directors to be elected by the class or classes of stock (including the Series G Preferred Stock) entitled to vote therefor, at each meeting of stockholders held for the purpose of electing directors. During the existence of a Four Dividend Default, a majority of the Directors not elected by the holders of the Series F Preferred Stock and Series G Preferred Stock (or their affiliates) shall have the right to declare and pay dividends on the Series F Preferred Stock and Series G Preferred Stock out of funds legally available for the payment of such dividends. Notwithstanding the foregoing provisions of this Section 1.4.2, upon payment in full of all quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock coming due subsequent to a Four-Dividend Default and the dividend which resulted in the Four-Dividend Default, so that no more than three consecutive quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock remain in default, the Special Series G Voting Rights of the holders of Series F Preferred Stock and Series G Preferred Stock shall be reduced so that they have the right, voting separately as a class, to elect two Additional Directors of the Company. Notwithstanding the foregoing provisions of this Section 1.4.2, upon payment in full of (i) all quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock coming due subsequent to a Two- Dividend Default and the dividend which resulted in the Two-Dividend Default, (ii) upon payment in full of all quarterly dividends on the Series F Preferred Stock and Series G Preferred Stock coming due subsequent to a Four- Dividend Default and three of the dividends which resulted in a Four-Dividend Default, so that, in each case, no more than one quarterly dividend remains in default, and (iii) upon payment in full or cure of any Lender Defaults, the Special Series G Voting Rights shall terminate. Upon any termination of the aforesaid Special Series G Voting Rights, the term of office of each director elected by the holders of the Series F Preferred Stock and Series G Preferred Stock pursuant to this Section 1.4.2 then in office shall thereupon terminate and upon such termination the number of directors constituting the Board of Directors shall, by resolution of the Board of Directors, be reduced accordingly, subject always to the subsequent increase of the number of directors from time to time pursuant to this Section 1.4.2 in the event of the periodic future vesting of the right of the holders of the Series F Preferred Stock and Series G Preferred Stock to elect Additional Directors. The term of office of any director elected by the holders of the Series F Preferred Stock and Series G Preferred Stock pursuant to this Section 1.4.2 shall terminate upon the earlier of the termination of the Special Series G Voting Rights and the election of a successor to such director at any meeting of holders of the Series F Preferred Stock and Series G Preferred Stock for the purpose of electing directors. 1.4.3. Special Series G Voting Rights may be exercised either at a special meeting of holders of the Series F Preferred Stock and Series G Preferred Stock, or at any annual or special meeting of stockholders of the Company, or may be exercised by the written consent of holders of the Series F Preferred Stock and Series G Preferred Stock pursuant to the Delaware General Corporation Law. 1.4.4. At any time when Special Series G Voting Rights pursuant to Section 1.4.2 above shall have vested in holders of the Series F Preferred Stock and Series G Preferred Stock, and if such rights shall have not already been initially exercised, a proper officer of the Company shall, upon the written request of any holder of record of the Series F Preferred Stock and Series G Preferred Stock then outstanding, addressed to the secretary of the Company, call a special meeting of holders of the Series F Preferred Stock and Series G Preferred Stock for the purpose of electing directors. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of the stockholders at the place for holding annual meetings of the stockholders of the Company or, if none, at a place designated by the secretary of the Company. If such a meeting shall not be called by the proper officer of the Company within ten (10) days after the personal service of such written request upon the secretary of the Company, or within ten (10) days after mailing the same within the United States, by first-class registered mail, addressed to the secretary of the Company at the Company's principal office (such mailing to be evidenced by registry receipt issued by the postal authorities), then the holders of record of ten percent (10%) of the shares of the Series F Preferred Stock or Series G Preferred Stock then outstanding may designate in writing a holder of Series F Preferred Stock or Series G Preferred Stock to call such meeting at the expense of the Company, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the same place as is elsewhere provided in this Section 1.4.4. Any holder of Series F Preferred Stock and Series G Preferred Stock shall have access to the stock books of the Company for the purpose of causing a meeting of holders of Series F Preferred Stock and Series G Preferred Stock to be called pursuant to the provisions hereof. 1.4.5. At any meeting held for the purpose of electing directors at which the holders of Series F Preferred Stock and Series G Preferred Stock shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of twenty- five percent (25%) of the then outstanding shares of Series F Preferred Stock and Series G Preferred Stock shall be required and shall be sufficient to constitute a quorum of such class for the election of directors by such series. In the absence of a quorum of the holders of Series F Preferred Stock and Series G Preferred Stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such Series shall have the power to adjourn the meeting for the election of directors which the holders of such Series are entitled to elect, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 1.4.6. Unless the vote of the holders of a greater number of shares of this Series G Preferred Stock shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of this Series G Preferred Stock at the time outstanding, voting together as a separate class, shall be necessary for authorizing, effecting or validating any of the following: (a) the creation, authorization or issue of any shares of any class or series of stock of the Company ranking prior to, or pari passu with, the shares of this Series G Preferred Stock as to dividends or upon liquidation or otherwise, or the reclassification of any authorized stock of the Company into any such prior shares, or the creation, authorization or issue of any obligation or security convertible into or evidencing the right to purchase any such prior shares; (b) the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto so as to affect adversely the preferences, rights, powers or privileges of this Series G Preferred Stock; and (c) the issuance or assumption of any debt greater than $250,000 (provided, however, if the Company has previously redeemed a portion of the Series F Preferred Stock and the Series G Preferred Stock, then this amount may be increased up to a maximum amount obtained by multiplying $250,000 by a fraction that is the inverse of the percentage of the Series F Preferred Stock and Series G Preferred Stock that remains outstanding after such redemption). 1.5. Redemption. 1.5.1. Optional Redemption. The Company shall have the right to redeem all or part of the Series G Preferred Stock upon not less than ten (10) days prior written notice to the holders of the Series G Preferred Stock. No shares of Series G Preferred Stock shall be redeemed pursuant to this Section 1.5.1 unless concurrently therewith shares of Series F Preferred Stock are redeemed on a pro rata basis (based on the respective Stated Values plus Unpaid Dividends of the Series F Preferred Stock and the Series G Preferred Stock) and no shares of Series F Preferred Stock shall be redeemed unless concurrently therewith shares of Series G Preferred Stock are redeemed on a pro rata basis (based on the respective Stated Values plus Unpaid Dividends of the Series F Preferred Stock and the Series G Preferred Stock). In the event of optional redemption by the Company within sixty days following any occurrence of a Book Value Event shares of Series F Preferred Stock and Series G Preferred Stock shall be redeemed at a redemption price equal to the Stated Value per share, plus all Unpaid Dividends payable with respect to such shares as of the date fixed for redemption, without interest. In the event of optional redemption by the Company prior to August 1, 2004 in the absence of the existence of a Book Value Event, shares of Series F Preferred Stock and Series G Preferred Stock shall be redeemed at a redemption price equal to 109% of the Stated Value per share, plus all Unpaid Dividends payable with respect to such shares as of the date fixed for redemption without interest. In either circumstance, such redemption price shall be paid in cash. 1.5.2. Mandatory Redemption. The Company shall redeem all (but not less than all) shares of Series F Preferred Stock and the Series G Preferred Stock on August 1, 2004 (the "Mandatory Redemption Date") at a cash redemption price equal to the Stated Value per share of such Series F Preferred Stock and Series G Preferred Stock, plus all Unpaid Dividends on each such share up to and including the date of redemption. Payment shall be applied to the redemption of the shares of Series F Preferred Stock and the Series G Preferred Stock, pro rata (based on the respective Stated Values plus Unpaid Dividends) among the holders of all outstanding shares of the Series F Preferred Stock and the Series G Preferred Stock on the Mandatory Redemption Date and shall be paid to each such holder upon surrender of the certificate or certificates evidencing such shares to be redeemed to the secretary of the Company. 1.5.3. Special Redemption. (a) Upon the occurrence of any Special Redemption Event (as hereinafter defined, each holder of Series F Preferred Stock and Series G Preferred Stock shall have the right to require that the Company redeem, to the extent the Company lawfully may do so, all or a portion of the shares of Series F Preferred Stock and Series G Preferred Stock held by such holder, at a redemption price in cash equal to the Stated Value per share (plus all Unpaid Dividends thereon to the redemption date). No shares of Series F Preferred Stock shall be redeemed pursuant to this Section 1.5.3 unless concurrently therewith shares of Series G Preferred Stock are redeemed on a pro rata basis (based on the respective Stated Values plus Unpaid Dividends of the Series F Preferred Stock and the Series G Preferred Stock) and no shares of Series G Preferred Stock shall be redeemed pursuant to this Section 1.5.3 unless concurrently therewith shares of Series F Preferred Stock are redeemed on a pro rata basis (based on the respective Stated Values plus Unpaid Dividends of the Series F Preferred Stock and the Series G Preferred Stock). (b) Within five Business Days following any Special Redemption Event (as hereinafter defined), the Company will mail to each holder of Series F Preferred Stock and Series G Preferred Stock a notice (the "Special Redemption Event Notice") (i) stating that a Special Redemption Event has occurred; (ii) setting forth a purchase date (the "Special Redemption Date"), which shall be no earlier than 20 Business Days nor later than 30 Business Days from the date the Special Redemption Event Notice is mailed; (iii) setting forth the Conversion Price then in effect with respect to such shares of Series F Preferred Stock and Series G Preferred Stock, pursuant to the provisions of Section 1.6 hereof; and (iv) setting forth the instructions reasonably determined by the Company, consistent with this Section 1.5.3 and applicable law, that a holder must follow in order to require the redemption of his Series F Preferred Stock and Series G Preferred Stock. Holders of Series F Preferred Stock and Series G Preferred Stock seeking to require that the Company redeem their shares will be required to surrender their shares to the Company prior to the close of business on the third Business Day prior to the Special Redemption Date. (c) Immediately prior to the redemption of any shares of Series F Preferred Stock and Series G Preferred Stock pursuant to this Section 1.5.3., the Company shall declare and pay a cash dividend on all outstanding shares of Series F Preferred Stock and Series G Preferred Stock in an amount equal to the aggregate amount of all accumulated and unpaid dividends that have been added to the Stated Value thereof and all accrued Unpaid Dividends thereon to the Special Redemption Date. Upon the Special Redemption Date, the redemption price of such shares shall be payable to the order of the person whose name appears on the certificate or certificates representing such shares as the owner thereof and each surrendered certificate shall be cancelled. From and after the date the Company shall irrevocably deposit an amount equal to the redemption price of the shares of Series F Preferred Stock and Series G Preferred Stock to be redeemed in trust for the holders of such shares with a bank having capital and surplus in excess of $100 million, which bank shall be named in the Special Redemption Event Notice, all rights of the holders of the Series F Preferred Stock and Series G Preferred Stock, except the right to receive such redemption price without interest upon surrender of their certificate or certificates, shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Company or be deemed to be outstanding for any purpose whatsoever. (d) "Special Redemption Event" shall mean: (i) consummation of any merger, reorganization or consolidation transaction involving the Company; (ii) the acquisition by purchase or otherwise of a controlling interest in the business or assets of, or the stock or other evidence of beneficial ownership of, any other Person if consummation of such transaction results in a transfer of ownership of a majority of the voting securities of the Company to such other Person or its stockholders; (iii) except in connection with the execution of the agreement contemplated by Section 1.1.6(b) hereof, the sale, lease, conveyance, transfer, exchange, encumbrance or other disposition, in one transaction or a series of related transactions, of more than 25% of the assets of the Company; or (iv) the sale or other disposition of voting securities of the Company, in a transaction or a series of related transactions, if consummation of such transaction or transactions results in a transfer of ownership of a majority of the voting securities of the Company. 1.5.4. With respect to any optional redemption of Series G Preferred Stock, each redemption of Series G Preferred Stock shall be made so that the number of shares of Series G Preferred Stock held by each registered holder thereof shall be reduced in an amount which shall bear the same ratio to the total number of shares of Series G Preferred Stock being so redeemed as the number of shares of Series G Preferred Stock then held by such holder bears to the aggregate number of shares of Series G Preferred Stock then outstanding. 1.5.5. Except as otherwise provided herein, at least twenty (20) days before any Redemption Date (ten (10) days if such redemption is in connection with a Book Value Event), a Redemption Notice shall be mailed, postage prepaid, to each holder of record of the Series F Preferred Stock and Series G Preferred Stock which is to be redeemed, at its address shown on the records of the Company; provided, however, that the Company's failure to give such Redemption Notice shall in no way affect its obligation to redeem the shares of Series F Preferred Stock and Series G Preferred Stock as provided herein. The Redemption Notice shall set forth: (i) the number of shares of Series G Preferred Stock held by the holder which shall be redeemed by the Company, and the total number of shares of Series F Preferred Stock and Series G Preferred Stock held by all holders of such series to be so redeemed; (ii) the Redemption Date and the redemption price; (iii) that the holder is to surrender to the Company, at the place designated therein, its certificate or certificates representing the shares of Series F Preferred Stock and Series G Preferred Stock to be redeemed; (iv) the Conversion Price then in effect with respect to such shares of Preferred Stock, pursuant to the provisions of Section 1.6 hereof; and (v) that the conversion rights of shares of Series F Preferred Stock and Series G Preferred Stock to be redeemed shall terminate at the close of business on the date prior to the Redemption Date. 1.5.6. Each holder of shares of Series F Preferred Stock and Series G Preferred Stock to be redeemed shall surrender the certificate or certificates representing such shares to the Company at the place designated in the Redemption Notice and thereupon the applicable redemption price for such shares shall be paid to the order of the Person whose name appears on such certificate or certificates and each surrendered certificate shall be cancelled and retired. 1.5.7. From and after the Redemption Date, no shares of Series F Preferred Stock and Series G Preferred Stock thereupon subject to redemption shall be entitled to any further accrual of any dividends pursuant to Section 1.2 hereof or to the conversion provisions set forth in Section 1.6 hereof; provided, however, that sufficient funds for payment of the redemption price for the shares of Series F Preferred Stock and Series G Preferred Stock to be redeemed are deposited or held and set apart for that purpose at the place of payment on or prior to the Redemption Date. 1.5.8. If the Redemption Notice shall have been mailed as provided herein, and if on or before the Redemption Date specified in such notice the consideration necessary for such redemption shall have been set apart so as to be available therefor, then on and after the close of business on the Redemption Date the shares of Series F Preferred Stock and Series G Preferred Stock called for redemption, notwithstanding that any certificate therefor shall not have been surrendered for cancellation, shall no longer be deemed outstanding, and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive upon surrender of their certificates the consideration payable upon redemption thereof. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. 1.6. Conversion Rights. 1.6.1. After June 30, 1996, each holder of the shares of Series G Preferred Stock shall have the right, at the election of such holder, exercised at any time and from time to time, to convert, subject to the terms and provisions hereof, all or any portion of such shares of Series G Preferred Stock into fully paid and non- assessable shares of Common Stock of the Company or any capital stock or other securities into which such Common Stock shall have been changed or any capital stock or other securities resulting from a reclassification thereof. Such conversion of Series G Preferred Stock to shares of Common Stock shall be made at the Conversion Price, subject to adjustment from time to time as set forth herein. Series G Preferred Stock may be converted by the holder thereof during normal business hours on any Business Day by surrender of the required number of shares of Series G Preferred Stock, accompanied by written evidence of the holder's election to convert such holder's Series G Preferred Stock or portion thereof, to the Company at its principal executive offices. Payment of the Conversion Price for the shares of Common Stock specified in such election shall be made by applying shares of Series G Preferred Stock, valued at the Stated Value per share. Payment of Unpaid Dividends, if any, applicable to such converted shares of Series F Preferred Stock shall be made in accordance with Section 1.6.4. 1.6.2. Upon the conversion of Series G Preferred Stock, the holders of such Series G Preferred Stock shall surrender the certificates representing such shares at the office of the Company. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion (or to pay any Unpaid Dividends in connection with such conversion) unless certificates evidencing such shares of Series G Preferred Stock being converted are either delivered to the Company or the holder notifies the Company that such certificates have been lost, stolen, or destroyed and delivers to the Company an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. 1.6.3. Each conversion of Series G Preferred Stock shall be deemed to have been effected immediately prior to the close of business on the Business Day on which such Series G Preferred Stock shall have been surrendered to the Company as provided herein, and such conversion shall be at the Conversion Price in effect at such time. On each such day that the conversion of shares of Series G Preferred Stock is deemed effected, the person or persons in whose name or names any certificate or certificates for shares of Common Stock are issuable upon such conversion shall be deemed to have become the holder or holders of record thereof. 1.6.4. As promptly as practical after the conversion of shares of Series G Preferred Stock, in whole or in part, and in any event within five (5) Business Days thereafter, the Company at its expense (including the payment by it of any applicable issue, stamp or other taxes, other than any income taxes and other than any taxes arising by reason of issuance of shares of Common Stock to any person other than such holder) will cause to be issued in the name of and delivered to the holder thereof or as such holder may direct, (i) a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon such conversion plus, in lieu of any fractional shares to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Current Market Price per share of Common Stock and (ii) Unpaid Dividends, if any, applicable as of the time of conversion to those shares of Preferred Stock which are converted. Such Unpaid Dividends shall be paid in cash, without interest. In case fewer than all the shares of Series G Preferred Stock represented by any surrendered certificate are converted into Common Stock, a new certificate representing the shares of Series G Preferred Stock not converted shall be issued without cost to the holder thereof. 1.7. Anti-Dilution Adjustments. The number of shares of Common Stock issuable upon any conversion provided for in Section 1.6 shall be subject to adjustment, from time to time, in accordance with the following provisions: 1.7.1. Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 1.7.3 or 1.7.4) without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to such issue or sale, then, in each such case, subject to Section 1.7.8, such Conversion Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) equal to the consideration per share paid for such additional shares of Common Stock. 1.7.2. Adjustment of Conversion Price Upon Extraordinary Dividends and Distributions. In case the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock, other than a dividend payable in Additional Shares of Common Stock, then, and in each such case, subject to Section 1.7.8, the Conversion Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution shall be reduced, effective as of the close of business on such record date, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Conversion Price by a fraction (a) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, less the amount of such dividend or distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock, (b) the denominator of which shall be such Current Market Price, provided that, in the event that the amount of such dividend as so determined is equal to or greater than 25% of such Current Market Price or in the event that such fraction is less than three fourths (3/4), in lieu of the foregoing adjustment, adequate provision shall be made so that the holders of the Series G Preferred Stock shall receive, in the same form and at the same time such dividend is payable to holders of Common Stock, a pro rata share of such dividend based upon the maximum number of shares of Common Stock at the time issuable to such holders upon conversion of such Series G Preferred Stock. 1.7.3. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, then and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex- dividend basis, on the date prior to the commencement of ex-dividend trading), provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 1.7.5) of such shares would be less than the Conversion Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued (a) no further adjustment of the Conversion Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Conversion Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which shall not have been exercised (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which shall not have been exercised), the Conversion Price computed upon the original issue, sale, grant or assumption (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Stock or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to Section 1.7.5) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to subdivision (b) or (c) above shall have the effect of increasing the Conversion Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (e) in the case of any such Options which expire by their terms not more than thirty (30) days after the date of issue, sale, grant or assumption thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subdivision (c) above. 1.7.4. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the date immediately prior to the day upon which such corporate action becomes effective. 1.7.5. Computation of Consideration. For the purposes of this Section 1.7, (a) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensation paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale, (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company (subject to confirmation by a firm of independent certified public accountants of recognized standing approved by the holders of a majority of the Series F Preferred Stock and Series G Preferred Stock), and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company (subject to confirmation by a firm of independent certified public accountants of recognized standing approved by the holders of a majority of the Series F Preferred Stock and Series G Preferred Stock); (b) Additional Shares of Common Stock deemed to have been issued pursuant to Section 1.7.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Shares of Common Stock deemed to have been issued pursuant to Section 1.7.4, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. 1.7.6. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 1.7.7. Dilution in Case of Other Securities. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in Section 1.8) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other provisions of this Section 1.7, the conversion rights granted to holders of Series G Preferred Stock, then, and in each such case, the computations, adjustments and readjustments provided for in this Section 1.7 with respect to the Conversion Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the conversion of the shares of Series G Preferred Stock, so as to protect the holders of the Series G Preferred Stock against the effect of such dilution. 1.7.8. Minimum Adjustment of Conversion Price. If the amount of any adjustment of the Conversion Price required pursuant to this Section 1.7 would be less than one-half of one percent (1%) of the Conversion Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one-half of one percent (1%) of such Conversion Price. 1.8. Consolidation, Merger, etc. 1.8.1. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities shall be changed into or exchanged for stock or other securities of any Other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities (other than a capital reorganization or reclassification resulting in the issue of Additional Shares of Common Stock for which adjustment in the Conversion Price is provided in subsection 1.7.1 or 1.7.2), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided herein, the holders of shares of Series G Preferred Stock, upon the conversion thereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Conversion Price in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such holder would actually have been entitled as a stockholder upon such consummation if such holder had exercised the conversion rights pertaining to the Series G Preferred Stock immediately prior thereto. 1.8.2. Assumption of Obligations. Notwithstanding anything to the contrary herein provided, the Company will not effect any of the transactions described in subsections (a) through (d) of Section 1.8.1 unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the conversion of shares of Series G Preferred Stock as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holders of the Series G Preferred Stock (a) the obligations of the Company with respect to the Series G Preferred Stock (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company with respect to the Series G Preferred Stock), and (b) the obligation to deliver to such holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Section 1.8, such holder may be entitled to receive, and such Person shall have similarly delivered to such holders of Series G Preferred Stock an opinion of counsel for such Person, which counsel shall be reasonably satisfactory to such holders, stating that the rights and privileges of the Series G Preferred Stock shall thereafter continue in full force and effect and the terms thereof (including, without limitation, all of the provisions of this Section 1.8) shall be applicable to the stock, securities, cash or property which such Person may be required to deliver upon any conversion of shares of Series G Preferred Stock or the exercise of any rights pursuant hereto. 1.9. Other Dilutive Events. In case any event shall occur as to which the provisions of Section 1.7 or Section 1.8 are not strictly applicable but the failure to make any adjustment would not fairly protect the conversion rights pertaining to shares of Series G Preferred Stock in accordance with the essential intent and principles of such sections, then, in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (such firm to be subject to the approval of the holders of a majority of the Series F Preferred Stock and the Series G Preferred Stock), which shall give their opinion regarding the adjustment, if any, on a basis consistent with the essential intent and principles established in Sections 1.7 and 1.8, necessary to preserve, without dilution, the conversion rights of the Series F Preferred Stock and the Series G Preferred Stock. Upon receipt of such opinion, the Company will promptly mail a copy thereof to each holder of Series F Preferred Stock and the Series G Preferred Stock and shall make the adjustments described therein. 1.10. No Dilution or Impairment. The Company will not, by amendment of its certificate of incorporation or by-laws or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Series G Preferred Stock, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of shares of Series G Preferred Stock against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of stock receivable upon the conversion of Series G Preferred Stock to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock on the conversion of the shares of Series G Preferred Stock from time to time outstanding, and (c) will not take any action which results in any adjustment of the Conversion Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the conversion of all of the outstanding shares of Series G Preferred Stock would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise. 1.11. Accountants' Report as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the conversion of shares of Series G Preferred Stock, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms hereof and cause independent certified public accountants of recognized standing (such firm to be subject to the approval of the holders of a majority of the outstanding Series F Preferred Stock and Series G Preferred Stock) selected by the Company to verify such computation and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Conversion Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 1.7) on account thereof. The Company will forthwith mail a copy of each such report to each holder of shares of Series F Preferred Stock and Series G Preferred Stock and will, upon the written request at any time of any holder of shares of Series F Preferred Stock and Series G Preferred Stock, furnish to such holder a like report setting forth the Conversion Price at the time in effect and showing in reasonable detail how it was calculated. The Company will also keep copies of all such reports at its principal office and will cause the same to be available for inspection at such office during normal business hours by any holder of Series F Preferred Stock and Series G Preferred Stock or any prospective purchaser of Series F Preferred Stock or Series G Preferred Stock designated by the holder thereof. 1.12. Notices of Corporate Action. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than dividends payable with respect to the Series F Preferred Stock and Series G Preferred Stock) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all of the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to each holder of shares of Series F Preferred Stock and Series G Preferred Stock a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. 1.13. Retirement of Converted or Redeemed Shares. No share or shares of Series G Preferred Stock acquired by the Company by reason of optional or mandatory redemption, purchase, conversion or otherwise shall be re-issued and all such shares shall be cancelled, retired and eliminated from the shares which the Company shall be authorized to issue. The Company may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of Series G Preferred Stock accordingly. FURTHER RESOLVED, that, before the Company shall issue any shares of Series G Preferred Stock, a certificate pursuant to Section 151 of the DGCL shall be made, executed, acknowledged, filed, and recorded in accordance with the provisions of Section 103 and 151 of the DGCL, and the proper officers of the Company be, and they hereby are, authorized and directed to do all acts and things which may be necessary or proper in their opinion to carry into effect the purposes and intent of this and the foregoing resolutions. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed in its name and on its behalf and attested on this 6th day of March, 1996 by duly authorized officers of this Corporation. NESTOR, INC. By: /s/ David Fox Name: David Fox Title: President and Chief Executive Officer EX-99 5 EXHIBIT 4 EXHIBIT 4 WAND I REGULAR WARRANT (NO. 2) ________________________________________________________ NESTOR, INC. Common Stock Purchase Warrant Dated as of March 7, 1996 _________________________________________________________ [THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION UNDER SUCH ACT IS IN EFFECT OR PURSUANT TO AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.] TABLE OF CONTENTS 1. Exercise of Warrant . . . . . . . . . . . . . . 2 1.1. Manner of Exercise . . . . . . . . . . . . 2 1.2. When Exercise Effective . . . . . . . . . 2 1.3. Delivery of Stock Certificates, etc. . . . 3 1.4. Company to Reaffirm Obligations . . . . . . 3 1.5. Payment by Application of Shares Otherwise Issuable . . . . . . . . . . . . 3 2. Adjustment of Common Stock Issuable Upon Exercise . . . . . . . . . . . . . . . . . . . . 4 2.1. General; Warrant Price . . . . . . . . . . 4 2.2. Adjustment of Warrant Price . . . . . . . . 5 2.2.1 Issuance of Additional Shares of Common Stock . . . . . . . . . . 5 2.2.2 Extraordinary Dividends and Distributions . . . . . . . . . . 5 2.3. Treatment of Options and Convertible Securities . . . . . . . . . . . . . . . . 6 2.4. Treatment of Stock Dividends, Stock Splits, etc. . . . . . . . . . . . . . . . 8 2.5. Computation of Consideration . . . . . . . 9 2.6. Adjustments for Combinations, etc. . . . . 10 2.7. Dilution in Case of Other Securities . . . 10 2.8. Minimum Adjustment of Warrant Price . . . . 11 3. Consolidation, Merger, etc . . . . . . . . . . . 11 3.1. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. . . . 11 3.2. Assumption of Obligations . . . . . . . . . 12 4. Other Dilutive Events . . . . . . . . . . . . . 13 5. No Dilution or Impairment . . . . . . . . . . . 13 6. Accountants' Report as to Adjustments . . . . . 14 7. Notices of Corporate Action . . . . . . . . . . 14 8. Registration of Common Stock . . . . . . . . . . 15 9. Restrictions on Transfer . . . . . . . . . . . . 16 9.1. Restrictive Legends . . . . . . . . . . . 16 10. Availability of Information . . . . . . . . . . 17 11. Reservation of Stock, etc. . . . . . . . . . . . 17 12. Registration and Transfer of Warrants, etc. . . 18 12.1. Warrant Register; Ownership of Warrants . 18 12.2. Transfer and Exchange of Warrants . . . . 18 12.3. Replacement of Warrants . . . . . . . . . 18 13. Registration Rights . . . . . . . . . . . . . . 19 14. Definitions . . . . . . . . . . . . . . . . . . 19 15. Remedies . . . . . . . . . . . . . . . . . . . . 23 16. No Rights or Liabilities as Stockholder. . . . 23 17. Notices . . . . . . . . . . . . . . . . . . . . 23 18. Amendments . . . . . . . . . . . . . . . . . . . 24 19. Expiration . . . . . . . . . . . . . . . . . . . 24 20. Descriptive Headings . . . . . . . . . . . . . . 24 21. Governing Law . . . . . . . . . . . . . . . . . 24 22. Judicial Proceedings; Waiver of Jury . . . . . . 24 EXHIBIT A . . . . . . . . . . . . . . . . . . . . . . 26 FORM OF SUBSCRIPTION . . . . . . . . . . . . . . . . 27 FORM OF ASSIGNMENT . . . . . . . . . . . . . . . . . 28 Wand I Regular Warrant (No. 2) NESTOR, INC. Common Stock Purchase Warrant New York, New York No. W-Y March 7, 1996 Nestor, Inc. (the "Company"), a Delaware corporation, for value received, hereby certifies that Wand/Nestor Investments L.P. ("Wand"), or registered assigns, is entitled to purchase from the Company 225,330 duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company at the purchase price per share of $1.25 (provided, however, if the Company has not on or before July 31, 1996 entered into a definitive agreement with a party with which it is currently negotiating, such agreement to contemplate an ongoing revenue stream to the Company, based on commercial exploitation of the Company's fraud detection technology or intelligent character recognition technology, and to require a non-refundable payment to the Company upon execution of at least $500,000 (if the transaction involves the Company's fraud detection technology) or $1.2 million (if the transaction involves the Company's intelligent character recognition technology), any such payment to be not primarily in consideration of any requirement that the Company render services, then the purchase price shall automatically be reduced to $.75), at any time or from time to time prior to 5:00 P.M., New York City time, on August 1, 2004 (or such later date as may be determined pursuant to section 19), all subject to the terms, conditions and adjustments set forth below in this Warrant. For purposes of this paragraph, any prepaid royalty relating to the use of the Company's fraud-detection technology shall not be deemed to be a refundable payment. This Warrant is being issued by the Company in consideration of Wand's performance of its obligations pursuant to the Securities Purchase Agreement dated as of March 7, 1996 by and between the Company and Wand (the "Purchase and Exchange Agreement"). Certain capitalized terms used in this Warrant are defined in section 14; references to an "Exhibit" are, unless otherwise specified, to one of the Exhibits attached to this Warrant and references to a "section" are, unless otherwise specified, to one of the sections of this Warrant. 1. Exercise of Warrant. 1.1. Manner of Exercise. This Warrant may be exercised after June 30, 1996 by the holder hereof, in whole or in part, during normal business hours on any Business Day, by surrender of this Warrant to the Company at its principal office, accompanied by a subscription substantially in the form attached to this Warrant (or a reasonable facsimile thereof) duly executed by such holder and accompanied by payment, in cash, by certified or official bank check payable to the order of the Company, or in the manner provided in Section 1.5, in the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment thereof) designated in such subscription by (b) $1.25 (provided, however, if the Company has not on or before July 31, 1996 entered into a definitive agreement with a party with which it is currently negotiating, such agreement to contemplate an ongoing revenue stream to the Company, based on commercial exploitation of the Company's fraud detection technology or intelligent character recognition technology, and to require a non- refundable payment to the Company upon execution of at least $500,000 (if the transaction involves the Company's fraud detection technology) or $1.2 million (if the transaction involves the Company's intelligent character recognition technology), any such payment to be not primarily in consideration of any requirement that the Company render services, then the purchase price shall automatically be reduced to $.75), and such holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) determined as provided in sections 2 through 4. For purposes of this paragraph 1.1, any prepaid royalty relating to the use of the Company's fraud-detection technology shall not be deemed to be a refundable payment. 1.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to the Company as provided in section 1.1, and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in section 1.3 shall be deemed to have become the holder or holders of record thereof. 1.3. Delivery of Stock Certificates, etc. As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within five Business 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, subject to section 9, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price per share on the Business Day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment thereof) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in section 1.1. 1.4. Company to Reaffirm Obligations. The Company will, at the time of each exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder all rights (including, without limitation, any rights to registration, pursuant to the Registration Rights Agreement referred to in section 8, of the shares of Common Stock or Other Securities issued upon such exercise) to which such holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such rights to such holder. 1.5. Payment by Application of Shares Otherwise Issuable. Upon any exercise of this Warrant, the holder hereof may, at its option, instruct the Company, by written notice accompanying the surrender of this Warrant at the time of such exercise, to apply to the payment required by section 1.1 such number of the shares of Common Stock otherwise issuable to such holder upon such exercise as shall be specified in such notice, in which case an amount equal to the excess of the aggregate Current Market Price of such specified number of shares on the date of exercise over the portion of the payment required by section 1.1 attributable to such shares shall be deemed to have been paid to the Company and the number of shares issuable upon such exercise shall be reduced by such specified number. 2. Adjustment of Common Stock Issuable Upon Exercise. 2.1. General; Warrant Price. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this section 2) be issuable upon such exercise, as designated by the holder hereof pursuant to section 1.1, by the fraction of which (a) the numerator is the price then applicable pursuant to section 1.1(b) of this Warrant and (b) the denominator is the Warrant Price in effect on the date of such exercise. The "Warrant Price" shall initially be $1.25 per share, provided, however, if the Company has not on or before July 31, 1996 entered into a definitive agreement with a party with which it is currently negotiating, such agreement to contemplate an ongoing revenue stream to the Company, based on commercial exploitation of the Company's fraud detection technology or intelligent character recognition technology, and to require a non- refundable payment to the Company upon execution of at least $500,000 (if the transaction involves the Company's fraud detection technology) or $1.2 million (if the transaction involves the Company's intelligent character recognition technology), any such payment to be not primarily in consideration of any requirement that the Company render services, then the Warrant Price shall automatically be reduced to $.75. The Warrant Price shall be adjusted and readjusted from time to time as further provided in this section 2 and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this section 2. For purposes of this paragraph 2.1, any prepaid royalty relating to the use of the Company's fraud-detection technology shall not be deemed to be a refundable payment. 2.2. Adjustment of Warrant Price. 2.2.1 Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to section 2.3 or 2.4) without consideration or for a consideration per share less than the Warrant Price in effect immediately prior to such issue or sale, then, and in each such case, subject to section 2.8, such Warrant Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) equal to the consideration per share paid for such Additional Shares of Common Stock. 2.2.2 Extraordinary Dividends and Distributions. In case the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock, other than a dividend payable in (a) Additional Shares of Common Stock or (b) cash dividends during any fiscal year of the Company that do not exceed twenty percent (20%) of the after tax earnings per share of the Common Stock for the immediately preceding fiscal year of the Company, then, and in each such case, subject to section 2.8, the Warrant Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution shall be reduced, effective as of the close of business on such record date, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Warrant Price by a fraction (x) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex- dividend trading, less the amount of such dividend or distribution (as determined in good faith by the Board of Directors of the Company, subject to confirmation by a firm of independent certified public accountants of recognized national standing approved by Wand/Nestor Investments L.P.) applicable to one share of Common Stock, and (y) the denominator of which shall be such Current Market Price. 2.3. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex- dividend basis, on the date prior to the commencement of ex-dividend trading), provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to section 2.5) of such shares would be less than the Warrant Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued (a) no further adjustment of the Warrant Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Stock or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to section 2.5) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; (d) no readjustment pursuant to subdivision (b) or (c) above shall have the effect of increasing the Warrant Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (e) in the case of any such Options which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subdivision (c) above. 2.4. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. 2.5. Computation of Consideration. For the purposes of this section 2, (a) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensation paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale, (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company (subject to confirmation by a firm of independent certified public accountants of recognized standing approved by Wand/Nestor Investments L.P.), and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company (subject to confirmation by a firm of independent certified public accountants of recognized standing approved by Wand/Nestor Investments L.P.); (b) Additional Shares of Common Stock deemed to have been issued pursuant to section 2.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Shares of Common Stock deemed to have been issued pursuant to section 2.4, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. 2.6. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 2.7. Dilution in Case of Other Securities. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in section 3) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other provisions of this section 2, the purchase rights granted by this Warrant, then, and in each such case, the computations, adjustments and readjustments provided for in this section 2 with respect to the Warrant Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution. 2.8. Minimum Adjustment of Warrant Price. If the amount of any adjustment of the Warrant Price required pursuant to this section 2 would be less than one percent (1%) of the Warrant Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one percent (1%) of such Warrant Price. 3. Consolidation, Merger, etc. 3.1. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities (other than a capital reorganization or reclassification resulting in the issue of Additional Shares of Common Stock for which adjustment in the Warrant Price is provided in section 2.2.1 or 2.2.2), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the holder of this Warrant, upon the exercise hereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Warrant Price in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such holder would actually have been entitled as a shareholder upon such consummation if such holder had exercised the rights represented by this Warrant immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in sections 2 through 4. 3.2. Assumption of Obligations. Notwithstanding anything contained in the Warrants or in the Purchase Agreement to the contrary, the Company will not effect any of the transactions described in clauses (a) through (d) of section 3.1 unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant), (b) the obligations of the Company under the Registration Rights Agreement and (c) the obligation to deliver to such holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this section 3, such holder may be entitled to receive, and such Person shall have similarly delivered to such holder an opinion of counsel for such Person, which counsel shall be reasonably satisfactory to such holder, stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this section 3) shall be applicable to the stock, securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto. 4. Other Dilutive Events. In case any event shall occur as to which the provisions of section 2 or section 3 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such sections, then, in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (such firm to be subject to the approval of Wand/Nestor Investments L.P.), which shall give their opinion regarding the adjustment, if any, on a basis consistent with the essential intent and principles established in sections 2 and 3, necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holder of this Warrant and shall make the adjustments described therein. 5. No Dilution or Impairment. The Company will not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of the Warrants from time to time outstanding, and (c) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise. 6. Accountants' Report as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of this Warrant, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and cause independent certified public accountants of recognized standing (such firm to be subject to the approval of Wand/Nestor Investments L.P.) selected by the Company to verify such computation and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by section 2) on account thereof. The Company will forthwith mail a copy of each such report to each holder of a Warrant and will, upon the written request at any time of any holder of a Warrant, furnish to such holder a like report setting forth the Warrant Price at the time in effect and showing in reasonable detail how it was calculated. The Company will also keep copies of all such reports at its principal office and will cause the same to be available for inspection at such office during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by the holder thereof. 7. Notices of Corporate Action. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a regular periodic dividend payable in cash out of earned surplus in an amount not exceeding the amount of the immediately preceding cash dividend for such period) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to each holder of a Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 45 days prior to the date therein specified. 8. Registration of Common Stock. If any shares of Common Stock required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. The shares of Common Stock (and Other Securities) issuable upon exercise of this Warrant (or upon conversion of any shares of Common Stock issued upon such exercise) shall constitute Registrable Securities (as such term is defined in the Registration Rights Agreement). Each holder of this Warrant shall be entitled to all of the benefits afforded to a holder of any such Registrable Securities under the Registration Rights Agreement and such holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Registration Rights Agreement applicable to such holder as a holder of such Registrable Securities. At any such time as Common Stock is listed on any national securities exchange, the Company will, at its expense, obtain promptly and maintain the approval for listing on each such exchange, upon official notice of issuance, the shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company will also list on such national securities exchange, will register under the Exchange Act and will maintain such listing of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company. 9. Restrictions on Transfer. 9.1. Restrictive Legends. Except as otherwise permitted by this section 9, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE WARRANT REPRESENTED BY THIS CERTIFICATE (AND THE SHARES OF COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON EXERCISE OF SUCH WARRANT) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON CERTAIN EXEMPTIONS FROM REGISTRATION THEREUNDER. THE SALE, PLEDGE, HYPOTHECATION OR OTHER TRANSFER OF SUCH WARRANT (AND OF SUCH SHARES OF COMMON STOCK OR OTHER SECURITIES) IS SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS AND CERTAIN RESTRICTIONS AND CONDITIONS CONTAINED IN A CERTAIN SECURITIES PURCHASE AGREEMENT AND RELATED AGREEMENTS DATED AS OF MARCH 7, 1996. THE HOLDER OF THIS CERTIFICATE BY ACCEPTANCE HEREOF AGREES TO BE BOUND BY SUCH RESTRICTIONS AND CONDITIONS. A COPY OF THE PURCHASE AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY." Except as otherwise permitted by this section 9, each certificate for Common Stock (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE IN RELIANCE ON CERTAIN EXEMPTIONS FROM REGISTRATION THEREUNDER. THE SALE, PLEDGE, HYPOTHECATION OR OTHER TRANSFER OF SUCH SHARES IS SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS AND CERTAIN RESTRICTIONS AND CONDITIONS CONTAINED IN A CERTAIN SECURITIES PURCHASE AND EXCHANGE AGREEMENT DATED AS OF MARCH 7, 1996. THE HOLDER OF THIS CERTIFICATE BY ACCEPTANCE HEREOF AGREES TO BE BOUND BY SUCH RESTRICTIONS AND CONDITIONS. A COPY OF THE SECURITIES PURCHASE AND EXCHANGE AGREEMENT IS ON FILE WITH THE SECRETARY OF THE COMPANY." 10. Availability of Information. The Company shall timely file the reports required to be filed by it under the Securities Act and the Exchange Act (including but not limited to the reports under sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act) and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with the requirements of this section 10. 11. Reservation of Stock, etc. The Company will at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, the number of shares of Common Stock (or Other Securities) from time to time issuable upon exercise of all Warrants at the time outstanding. All shares of Common Stock (or Other Securities) issuable upon exercise of any Warrants shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and nonassessable with no liability on the part of the holders thereof. 12. Registration and Transfer of Warrants, etc. 12.1. Warrant Register; Ownership of Warrants. The Company will keep at its principal office a register in which the Company will provide for the registration of Warrants and the registration of transfers of Warrants. The Company may treat the Person in whose name any Warrant is registered on such register as the owner thereof for all other purposes, and the Company shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes. Subject to section 9, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. 12.2. Transfer and Exchange of Warrants. Upon surrender of any Warrant for registration of transfer or for exchange to the Company at its principal office, the Company at its expense will (subject to compliance with section 9, if applicable) execute and deliver in exchange therefor a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, 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 or Warrants so surrendered. 12.3. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, upon delivery of an indemnity bond in such reasonable amount as the Company may determine or, in the case of any such mutilation, upon the surrender of such Warrant for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 13. Registration Rights. The Purchaser or any assignee of this Warrant shall be entitled to all rights and benefits regarding the registration of Common Stock and Registrable Securities set forth in the Registration Rights Agreement. 14. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Additional Shares of Common Stock: All shares (including treasury shares) of Common Stock issued or sold (or, pursuant to section 2.3 or 2.4, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than (a) the issuance of shares upon conversion of the Company's Series A, Series B, Series D, Series E, Series F, Series G and Series H Convertible Preferred Stock, (b) Shares issued upon the exercise of the common stock purchase warrants and non-qualified options listed in Exhibit A hereto, providing for the purchase of an aggregate of 1,000,650 shares of Common Stock (based on the current capitalization of the Company); (c) shares issued upon the exercise of the Warrants, (d) not to exceed 2,000,000 shares (subject to equitable adjustment in the event of any combination, reclassification, stock split, dividend or recapitalization of the Company) issued upon the exercise of options granted or to be granted under the Company's stock option plans as in effect on the date hereof or under any other employee stock option, compensation or purchase plan or plans adopted or assumed after such date, (e) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clauses (a) through (d) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, but only if and to the extent that such adjustments are required as the result of the original issuance of the Warrants, and (f) such additional number of shares as may become issuable upon the exercise or conversion of any of the securities referred to in the foregoing clauses (a) through (d) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock. Business Day: Any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the City of New York are authorized by law to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. Commission: The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. Common Stock: As defined in the introduction to this Warrant, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. Company: As defined in the introduction to this Warrant, such term to include any corporation which shall succeed to or assume the obligations of the Company hereunder in compliance with section 3. Convertible Securities: Any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. Current Market Price: On any date specified herein, the average daily Market Price during the period of the most recent 20 days, ending on such date, on which the national securities exchanges were open for trading, except that if no Common Stock is then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. Exchange Act: The Securities Exchange Act of 1934, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Market Price: On any date specified herein, the amount per share of the Common Stock, equal to (a) the last sale price of such Common Stock, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted to trading, or (b) if such Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security by the NASD, the last trading price of the Common Stock on such date, or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (d) if such Common Stock is not then listed or admitted to trading on any national exchange or quoted in the over-the-counter market, the value as determined by a firm of independent public accountants of recognized standing selected by the Board of Directors of the Company, and approved by Wand/Nestor Investments L.P., as of the last day of any month ending within 30 days preceding the date as of which the determination is to be made. NASD: The National Association of Securities Dealers, Inc. Options: Rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. Other Securities: Any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, 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 3 or otherwise. Person: A corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. Purchase and Exchange Agreement: The Securities Purchase and Exchange Agreement, dated as of January 31, 1996, by and among the Company, Wand and certain affiliates of Wand. Registrable Securities: As defined in Section 3 of the Registration Rights Agreement. Registration Rights Agreement: The Amended and Restated Registration Rights Agreement dated as of January 31, 1996, substantially in the form of Exhibit IX to the Purchase and Exchange Agreement, as further amended as of March 7, 1996. Securities Act: The Securities Act of 1933, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Securities Purchase Agreement: The Securities Purchase Agreement, dated as of March 7, 1996, by and between Wand and the Company. Transfer: Any sale, assignment, pledge or other disposition of any security, or of any interest therein, which could constitute a "sale" as that term is defined in section 2(3) of the Securities Act. Wand: As defined in section 1, and its successors and assigns. Warrant Price: As defined in section 2.1. Warrants: (a) Those certain Common Stock Purchase Warrants, initially providing for the acquisition of an aggregate of 400,000 shares of Common Stock, originally issued pursuant to the Letter of Engagement, dated April 26, 1994, among the Company, Hill & Partners and Wand Partners Inc. (and any warrants issued in substitution therefor), (b) those certain Common Stock Purchase Warrants, initially providing for the acquisition of 1,700,000 shares of Common Stock, originally issued to Wand/Nestor Investments L.P. and Wand/Nestor Investments II L.P. as the "New Warrant" and the "Fee Warrant" pursuant to the Revised Standby Agreement (and any warrants issued in substitution therefor) and (c) those certain Common Stock Purchase Warrants, initially providing for the acquisition of 399,040 shares of Common Stock, originally issued in connection with sale of the Series F Convertible Preferred Stock and Series G Convertible Preferred Stock of the Company pursuant to the Purchase and Exchange Agreement (and any warrants issued in substitution therefor) and the Securities Purchase Agreement (and any warrants issued in substitution therefor). 15. Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 16. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company or as imposing any obligation on such holder to purchase any securities or as imposing any liabilities on such holder as a stockholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 17. Notices. All notices and other communications under this Warrant shall be in writing and shall be delivered, or mailed by registered or certified mail, return receipt requested, by a nationally recognized overnight courier, postage prepaid, addressed (a) if to any holder of any Warrant, at the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if to the Company, to the attention of its President at its principal office, provided that the exercise of any Warrant shall be effective in the manner provided in section 1. 18. Amendments. 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. 19. Expiration. The Company will give the holder of this Warrant not less than six weeks nor more than two months notice of the expiration of the right to exercise this Warrant. The right to exercise this Warrant shall expire at 5:00 p.m., New York City time, on August 1, 2004, unless the Company shall fail to give such notice as aforesaid, in which event the right to exercise this Warrant shall not expire until a date six weeks after the date on which the Company shall give the holder hereof notice of the expiration of the right to exercise this Warrant. 20. Descriptive Headings. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. 21. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. 22. Judicial Proceedings; Waiver of Jury. Any judicial proceeding brought against the Company with respect to this Warrant may be brought in any court of competent jurisdiction in the State of New York or of the United States of America for the Southern District of New York and, by execution and delivery of this Agreement, the Company (a) accepts, generally and unconditionally, the nonexclusive jurisdiction of such courts and any related appellate court, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Warrant, subject to any rights of appeal, and (b) irrevocably waives any objection the Company may now or hereafter have as to the venue of any such suit, action or proceeding brought in such a court or that such court is an inconvenient forum. The Company hereby waives personal service of process and consents, that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of section 17, and service so made shall be deemed completed on the third Business Day after such service is deposited in the mail or, if earlier, when delivered. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any holder of any Warrant to bring proceedings against the Company in the courts of any other jurisdiction. THE COMPANY HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY, OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS WARRANT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. NESTOR, INC. By: /s/ David Fox Title: President and Chief Executive Officer EXHIBIT A CURRENTLY OUTSTANDING WARRANTS The Company has currently outstanding: (a) warrants to Purchase 299,375 shares of the Common Stock of the Company at $3.00 per share expiring on March 31, 1996, (b) other warrants to purchase 105,275 shares of Common Stock of the Company at $2.00 per share expiring in 1998, and (c) other warrants and non-qualified options to purchase 138,000 shares of the Common Stock of the Company at prices between $1.20 per share and $4.625 per share expiring in 1996, 1997 and 1999. These warrants are issued as follows: Underlying Exercise Shares of Price per Common Share of Warrant Holders Stock Common Stock Expiration Purchasers of Series 299,375 $3.00 August 31, 1996 B Convertible Preferred Stock Purchasers of Series 105,275 2.00 September 28,1998 D Convertible Preferred Stock Assignees of Reich & Co., Inc.: James Gerson 38,667 $1.20 June 30, 1997 Rodd Macklin 5,800 $1.20 June 30, 1997 One Hundred Pearl Ltd. 71,533 $1.20 June 30, 1997 Hampshire Securities Corp. 2,000 $1.20 June 30, 1997 Officers and Directors of Nestor, Inc.: Sam Albert 10,000 $4.625 April 30, 1996 Sam Albert 10,000 $1.30 February 23, 1997 TOTAL 541,850 FORM OF SUBSCRIPTION [To be executed only upon exercise of Warrant] To NESTOR, INC.; The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases thereunder, ______(1) shares of Common Stock of Nestor, Inc. and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to , whose address is . Dated: (Signature must conform in all respects to name of holder as specified on the face of Warrant) (Street Address) (City)(State)(Zip Code) ___________________ 1 Insert here the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for Additional Shares of Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the Warrant, to the holder surrendering the Warrant. FORM OF ASSIGNMENT [To be executed only upon transfer of Warrant] For value received, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto the right represented by such Warrant to purchase shares of Common Stock of Nestor, Inc. to which such Warrant relates, and appoints Attorney to make such transfer on the books of Nestor, Inc. maintained for such purpose, with full power of substitution in the premises. Dated: (Signature must conform in all respects to name of holder as specified on the face of Warrant) (Street Address) (City)(State)(Zip Code) Signed in the presence of: EX-99 6 EXHIBIT 5 EXHIBIT 5 JOINT FILING AGREEMENT The undersigned, and each of them, do hereby agree and consent to the filing of a single statement on behalf of all of them on Schedule 13D and amendments thereto, in accordance with the provisions of Rule 13d-1(f)(1) of the Securities Exchange Act of 1934. Dated: March 12, 1996 By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer WAND (NESTOR) INC. By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman WAND/NESTOR INVESTMENTS L.P. By: Wand (Nestor) Inc., as General Partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman WAND/NESTOR INVESTMENTS II L.P. By: Wand (Nestor) Inc., as General Partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman WAND/NESTOR INVESTMENTS III L.P. By: Wand (Nestor) Inc., as General Partner By: /s/ Bruce W. Schnitzer Name: Bruce W. Schnitzer Title: Chairman -----END PRIVACY-ENHANCED MESSAGE-----