EXHIBIT 10.11

 
REGISTRATION RIGHTS AGREEMENT
 
REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of May 25, 2006, by
and among Nestor, Inc., a Delaware corporation (the “Company”), and the
undersigned buyers (each, a “Buyer”, and collectively, the “Buyers”).
 

WHEREAS:
 
A. In connection with the Securities Purchase Agreement, dated as of May 24,
2006, by and among the Company and the Buyers (the “Securities Purchase
Agreement”), the Company has agreed, upon the terms and subject to the
conditions set forth in the Securities Purchase Agreement, to issue and sell to
each Buyer (i) the Company’s 7.0% Senior Secured Convertible Notes (the
“Notes”), which will be convertible into shares (“Conversion Shares”) of the
Company’s common stock, par value $.01 per share (“Common Stock”), in accordance
with the terms of the Notes and (ii) warrants (the “Warrants”) which will be
exercisable to purchase shares of Common Stock (as exercised collectively, the
“Warrant Shares”).
 
B. In accordance with the terms of the Securities Purchase Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the “1933 Act”), and applicable state
securities laws.
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the Buyers
hereby agree as follows:
 
1. Definitions.
 
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement. As used in
this Agreement, the following terms shall have the following meanings:
 
a. “Business Day” means any day other than Saturday, Sunday or any other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
 
b. “Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement.
 
c. “Effective Date” means the date the Registration Statement has first been
declared effective by the SEC.
 
d. “Effectiveness Deadline” means the date which is (i) in the event that the
Registration Statement is not subject to full review by the SEC, 60 calendar
days after the Filing Deadline or (ii) in the event that the Registration
Statement is subject to full review by the SEC, 90 calendar days after the
Filing Deadline.
 
e. “Filing Deadline” means the earlier of (i) 10 calendar days after the
Company’s receipt of Stockholder Approval and (ii) July 17, 2006.
 
f. “Investor” means a Buyer or any transferee or assignee thereof to whom a
Buyer or another Investor assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section
9.
 

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g. “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
 
h. “register,” “registered,” and “registration” refer to a registration effected
by preparing and filing one or more Registration Statements (as defined below)
in compliance with the 1933 Act and pursuant to Rule 415 and the declaration or
ordering of effectiveness of such Registration Statement(s) by the SEC.
 
i. “Registrable Securities” means (i) the Conversion Shares issued or issuable
upon conversion of the Notes, (ii) the Warrant Shares issued or issuable upon
exercise of the Warrants, (iii) any share capital of the Company issued or
issuable with respect to the Notes, the Conversion Shares, the Warrant Shares or
the Warrants as a result of any split, dividend, recapitalization, exchange or
similar event or otherwise, without regard to any limitations on conversion of
the Notes or exercise of the Warrants and (iv) any share capital of the Company
issued or issuable upon a repurchase, redemption or similar transaction with
respect to the Notes.
 
j. “Registration Statement” means a registration statement or registration
statements of the Company filed under the 1933 Act covering the Registrable
Securities.
 
k. “Required Holders” means the holders of at least 75% of the Registrable
Securities.
 
l. “Required Registration Amount” means 120% of the number of Registrable
Securities issued and issuable pursuant to the Notes and Warrants as of the
trading day immediately preceding the applicable date of determination, subject
to adjustment as provided in Section 2(e) (without regard to any limitations on
conversion of the Notes or exercise of the Warrants).
 
m. “Rule 415” means Rule 415 under the 1933 Act or any successor rule providing
for offering securities on a continuous or delayed basis.
 
n. “SEC” means the United States Securities and Exchange Commission.
 
2. Registration.
 
a. Mandatory Registration. The Company shall prepare, and, as soon as
practicable but in no event later than the Filing Deadline, file with the SEC
the Registration Statement on Form S-3 covering the resale of all of the
Registrable Securities. In the event that Form S-3 is unavailable for such a
registration, the Company shall use such other form as is available for such a
registration, subject to the provisions of Section 2(d). The Registration
Statement prepared pursuant hereto shall register for resale at least the number
of shares of Common Stock equal to the Required Registration Amount as of the
date the Registration Statement is initially filed with the SEC. The
Registration Statement shall contain (except if otherwise directed by the
Required Holders) the “Selling Stockholders” and “Plan of Distribution” sections
in substantially the form attached hereto as Exhibit A. The Company shall use
its best efforts to have the Registration Statement declared effective by the
SEC as soon as practicable, but in no event later than the Effectiveness
Deadline. By 9:30am on the Business Day immediately following the Effective
Date, the Company shall file with the SEC in accordance with Rule 424 under the
1933 Act the final prospectus to be used in connection with sales pursuant to
such Registration Statement.
 

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b. Allocation of Registrable Securities. The initial number of Registrable
Securities included in any Registration Statement and any increase in the number
of Registrable Securities included therein shall be allocated pro rata among the
Investors based on the number of Registrable Securities held by each Investor at
the time the Registration Statement covering such initial number of Registrable
Securities or increase thereof is declared effective by the SEC. In the event
that an Investor sells or otherwise transfers any of such Investor’s Registrable
Securities to one or more Investors, each transferee Investor shall be allocated
a pro rata portion of the number of Registrable Securities included in such
Registration Statement for such transferor Investor at the time of transfer. Any
shares of Common Stock included in a Registration Statement that remain
allocated to any Person which ceases to hold any Registrable Securities covered
by such Registration Statement shall be allocated to the remaining Investors,
pro rata based on the number of Registrable Securities then held by such
Investors which are covered by such Registration Statement. In no event shall
the Company include any securities other than Registrable Securities on any
Registration Statement without the prior written consent of the Required
Holders.
 
c. Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have
the right to select two legal counsel to review and oversee any registration
pursuant to this Section 2 (collectively, the “Legal Counsel”), which shall be
Schulte Roth & Zabel LLP and Drinker Biddle & Reath LLP or such other counsel as
thereafter designated by the Required Holders. The Company and Legal Counsel
shall reasonably cooperate with each other in performing the Company’s
obligations under this Agreement.
 
d. Ineligibility for Form S-3. In the event that Form S-3 is not available for
the registration of the resale of Registrable Securities hereunder, the Company
shall (i) register the resale of the Registrable Securities on another
appropriate form reasonably acceptable to the Required Holders and (ii)
undertake to register the Registrable Securities on Form S-3 as soon as such
form is available, provided that the Company shall maintain the effectiveness of
the Registration Statement then in effect until such time as a Registration
Statement on Form S-3 covering the Registrable Securities has been declared
effective by the SEC.
 
e. Sufficient Number of Shares Registered. In the event the number of shares
available under a Registration Statement filed pursuant to Section 2(a) is
insufficient to cover all of the Registrable Securities required to be covered
by such Registration Statement or an Investor’s allocated portion of the
Registrable Securities pursuant to Section 2(b), the Company shall amend the
applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least
the Required Registration Amount as of the trading day immediately preceding the
date of the filing of such amendment or new Registration Statement, in each
case, as soon as practicable, but in any event not later than 30 days after the
necessity therefor arises. The Company shall use its best efforts to cause such
amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. For purposes of the foregoing
provision, the number of shares available under a Registration Statement shall
be deemed “insufficient to cover all of the Registrable Securities or an
Investor’s allocated portion of the Registrable Securities” if at any time the
number of shares of Common Stock available for resale under the Registration
Statement is less than the Required Registration Amount as of such time. The
calculation set forth in the foregoing sentence shall be made without regard to
any limitations on the conversion of the Notes or the exercise of the Warrants
and such calculation shall assume that the Notes are then convertible for shares
of Common Stock at the then prevailing Conversion Price (as defined in the
Notes) and the Warrants are then exercisable for shares of Common Stock at the
then prevailing Exercise Price (as defined in the Warrants).
 

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f. Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement. If (i) a Registration Statement covering all of the
Registrable Securities required to be covered thereby and required to be filed
by the Company pursuant to this Agreement is (A) not filed with the SEC on or
before the applicable Filing Deadline (a “Filing Failure”) or (B) not declared
effective by the SEC on or before the applicable Effectiveness Deadline (an
“Effectiveness Failure”) or (ii) on any day after the Effective Date sales of
all of the Registrable Securities required to be included on such Registration
Statement cannot be made (other than during an Allowable Grace Period (as
defined in Section 3(r)) pursuant to such Registration Statement or otherwise
(including, without limitation, because of a failure to keep such Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to such Registration Statement, to register a sufficient number
of shares of Common Stock or to maintain the listing of the Common Stock) (a
“Maintenance Failure”) then, as partial relief for the damages to any holder by
reason of any such delay in or reduction of its ability to sell the underlying
shares of Common Stock (which remedy shall not be exclusive of any other
remedies available at law or in equity), the Company shall pay to each holder of
Registrable Securities relating to such Registration Statement an amount in cash
equal to 1.5% of the aggregate Purchase Price (as defined in the Securities
Purchase Agreement) of such Investor’s Notes relating to the Registrable
Securities required to be included in such Registration Statement on each of the
following dates: (i) on every 30th day after the day of a Filing Failure and
thereafter (pro rated for periods totaling less than 30 days) until such Filing
Failure is cured; (ii) on every 30th day after the day of an Effectiveness
Failure and thereafter (pro rated for periods totaling less than 30 days) until
such Effectiveness Failure is cured; (iii) on every 30th day after the initial
day of a Maintenance Failure and thereafter (pro rated for periods totaling less
than 30 days) until such Maintenance Failure is cured. The payments to which a
holder shall be entitled pursuant to this Section 2(f) are referred to herein as
“Registration Delay Payments.” Registration Delay Payments shall be paid on the
earlier of (I) the 30th day after the event or failure giving rise to the
Registration Delay Payments has occurred and (II) the third Business Day after
the event or failure giving rise to the Registration Delay Payments is cured. In
the event the Company fails to make Registration Delay Payments in a timely
manner, such Registration Delay Payments shall bear interest at the rate of two
percent per month (prorated for partial months) until paid in full.
Notwithstanding anything herein or in the Securities Purchase Agreement to the
contrary, in no event shall the aggregate amount of Registration Delay Payments
payable to any Investor exceed, in the aggregate, 10% of the aggregate Purchase
Price of such Investor’s Notes.
 
3. Related Obligations.
 
At such time as the Company is obligated to file a Registration Statement with
the SEC pursuant to Section 2(a), 2(d) or 2(e), the Company will use its best
efforts to effect the registration of the Registrable Securities in accordance
with the intended method of disposition thereof and, pursuant thereto, the
Company shall have the following obligations:
 
a. The Company shall submit to the SEC, within two Business Days after the
Company learns that no review of a particular Registration Statement will be
made by the staff of the SEC or that the staff has no further comments on a
particular Registration Statement, as the case may be, a request for
acceleration of effectiveness of such Registration Statement to a time and date
not later than 48 hours after the submission of such request. The Company shall
keep each Registration Statement effective pursuant to Rule 415 at all times
until the earlier of (i) the date as of which the Investors may sell all of the
Registrable Securities covered by such Registration Statement without
restriction pursuant to Rule 144(k) (or any successor thereto) promulgated under
the 1933 Act or (ii) the date on which the Investors shall have sold all of the
Registrable Securities covered by such Registration Statement (the “Registration
Period”). The Company shall ensure that each Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) does
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 the case of prospectuses, in the light of the circumstances in which they
were made) not misleading.
 

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b. The Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which prospectus
is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be
necessary to keep such Registration Statement effective at all times during the
Registration Period, and, during such period, comply with the provisions of the
1933 Act with respect to the disposition of all Registrable Securities of the
Company covered by such Registration Statement until such time as all of such
Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement. In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement
(including pursuant to this Section 3(b)) by reason of the Company filing a
report on Form 10-Q, Form 10-K or any analogous report under the Securities
Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have
incorporated such report by reference into such Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on the
same day on which the 1934 Act report is filed which created the requirement for
the Company to amend or supplement such Registration Statement.
 
c. The Company shall (A) permit Legal Counsel and each Investor to review and
comment upon (i) a Registration Statement at least three Business Days prior to
its filing with the SEC and (ii) all amendments and supplements to all
Registration Statements (except for Annual Reports on Form 10-K, and Reports on
Form 10-Q, Reports on Form 8-K and any similar or successor reports) within a
reasonable number of days prior to their filing with the SEC, and (B) not file
any Registration Statement or amendment or supplement thereto in a form to which
Legal Counsel or any Investor reasonably objects. The Company shall not submit a
request for acceleration of the effectiveness of a Registration Statement or any
amendment or supplement thereto without the prior approval of Legal Counsel,
which consent shall not be unreasonably withheld, conditioned or delayed. The
Company shall furnish to Legal Counsel, without charge, (i) copies of any
correspondence from the SEC or the staff of the SEC to the Company or its
representatives relating to any Registration Statement, (ii) promptly after the
same is prepared and filed with the SEC, one copy of any Registration Statement
and any amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, if requested by an Investor, and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto. The Company shall cooperate with Legal
Counsel in performing the Company’s obligations pursuant to this Section 3.
 
d. The Company shall furnish to each Investor whose Registrable Securities are
included in any Registration Statement, without charge, (i) promptly after the
same is prepared and filed with the SEC, at least one copy of such Registration
Statement and any amendment(s) thereto, including financial statements and
schedules, all documents incorporated therein by reference, if requested by an
Investor, all exhibits and each preliminary prospectus, (ii) upon the
effectiveness of any Registration Statement, ten (10) copies of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably request)
and (iii) such other documents, including copies of any preliminary or final
prospectus, as such Investor may reasonably request from time to time in order
to facilitate the disposition of the Registrable Securities owned by such
Investor.
 
e. The Company shall use its best efforts to (i) register and qualify, unless an
exemption from registration and qualification applies, the resale by Investors
of the Registrable Securities covered by a Registration Statement under such
other securities or “blue sky” laws of all applicable jurisdictions in the
United States, (ii) prepare and file in those jurisdictions, such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period, and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to (x) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(e), (y) subject itself to general taxation in any such jurisdiction,
or (z) file a general consent to service of process in any such jurisdiction.
The Company shall promptly notify Legal Counsel and each Investor who holds
Registrable Securities of the receipt by the Company of any notification with
respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or “blue sky” laws of any
jurisdiction in the United States or its receipt of notice of the initiation or
threatening of any proceeding for such purpose.
 

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f. The Company shall notify Legal Counsel and each Investor in writing of the
happening of any event, as promptly as practicable after becoming aware of such
event, as a result of which the prospectus included in a Registration Statement,
as then in effect, includes an untrue statement of a material fact or an
omission to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (provided that in no event shall such notice contain
any material non-public information), and, subject to Section 3(r), promptly
prepare a supplement or amendment to such Registration Statement to correct such
untrue statement or omission and deliver ten (10) copies of such supplement or
amendment to Legal Counsel and each Investor (or such other number of copies as
Legal Counsel or such Investor may reasonably request). The Company shall also
promptly notify Legal Counsel and each Investor in writing (i) when a prospectus
or any prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to Legal
Counsel and each Investor by facsimile on the same day of such effectiveness and
by overnight mail), (ii) of any request by the SEC for amendments or supplements
to a Registration Statement or related prospectus or related information, and
(iii) of the Company’s reasonable determination that a post-effective amendment
to a Registration Statement would be appropriate.
 
g. The Company shall use its best efforts to prevent the issuance of any stop
order or other suspension of effectiveness of a Registration Statement, or the
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest possible moment and to
notify Legal Counsel and each Investor who holds Registrable Securities being
sold of the issuance of such order and the resolution thereof or its receipt of
notice of the initiation or threat of any proceeding for such purpose.
 
h. If, after the execution of this Agreement, an Investor believes, after
consultation with its legal counsel, that it could reasonably be deemed to be an
underwriter of Registrable Securities, at the request of such Investor, the
Company shall furnish to such Investor, on the date of the effectiveness of the
Registration Statement and thereafter from time to time on such dates as such
Investor may reasonably request (i) a letter, dated such date, from the
Company’s independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to such Investor, and (ii) an
opinion, dated as of such date, of counsel representing the Company for purposes
of such Registration Statement, in form, scope and substance as is customarily
given in an underwritten public offering, addressed to such Investor.
 
i. If after the execution of this Agreement an Investor believes, after
consultation with its legal counsel, that it could reasonably be deemed to be an
underwriter of Registrable Securities, at the request of such Investor, the
Company shall make available for inspection by (i) such Investor, (ii) its legal
counsel and (iii) one firm of accountants or other agents retained by all such
Investors (collectively, the “Inspectors”) during regular business hours and
upon reasonable notice, all pertinent financial and other records, and pertinent
corporate documents and properties of the Company (collectively, the “Records”),
as shall be reasonably deemed necessary by each Inspector, and cause the
Company’s officers, directors and employees to supply all information which any
Inspector may reasonably request; provided, however, that each Inspector shall
agree to hold in strict confidence and shall not make any disclosure (except to
an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this Agreement. Each Investor agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and any Investor) shall be deemed
to limit the Investors’ ability to sell Registrable Securities in a manner which
is otherwise consistent with applicable laws and regulations.
 

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j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i) disclosure
of such information is necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction, or (iv) such information has
been made generally available to the public. The Company agrees that it shall,
upon learning that disclosure of such information concerning an Investor is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt written notice to such Investor and allow such
Investor, at the Investor’s expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
 
k. The Company shall cause all of the Registrable Securities covered by a
Registration Statement to be listed on each securities exchange or automated
quotation system on which securities of the same class or series issued by the
Company are then listed. The Company shall pay all fees and expenses in
connection with satisfying its obligation under this Section 3(k).
 
l. The Company shall cooperate with the Investors who hold Registrable
Securities being offered and, to the extent applicable, facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a Registration
Statement and enable such certificates to be in such amounts as the Investors
may reasonably request and registered in such names as the Investors may
request.
 
m. If requested by an Investor, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as an Investor reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering
and (ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
(iii) as soon as practicable, supplement or make amendments to any Registration
Statement if reasonably requested by an Investor holding any Registrable
Securities.
 
n. The Company shall use its best efforts to cause the Registrable Securities
covered by a Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.
 
o. The Company shall make generally available to its security holders as soon as
practical, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with, and in the manner
provided by, the provisions of Rule 158 under the 1933 Act) covering a
twelve-month period beginning not later than the first day of the Company’s
fiscal quarter next following the effective date of a Registration Statement.
 
p. The Company shall otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC in connection with any registration
hereunder.
 
q. Within two Business Days after a Registration Statement that covers
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the
SEC in the form attached hereto as Exhibit B.
 

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r. Notwithstanding anything to the contrary herein, at any time after the
Effective Date, the Company may delay the disclosure of material non-public
information concerning the Company the disclosure of which at the time is not,
in the good faith opinion of the Board of Directors of the Company, in the best
interest of the Company and, in the opinion of counsel to the Company, otherwise
required (a “Grace Period”); provided, that the Company shall promptly (i)
notify the Investors in writing of the existence of material non-public
information giving rise to a Grace Period (provided that in each notice the
Company will not disclose the content of such material non-public information to
the Investors) and the date on which the Grace Period will begin, and (ii)
notify the Investors in writing of the date on which the Grace Period ends; and,
provided further, that no Grace Period shall exceed 20 consecutive days and no
more than two Grace Periods shall occur during any 365 day period and the first
day of any Grace Period must be at least two trading days after the last day of
any prior Grace Period (each, an “Allowable Grace Period”). For purposes of
determining the length of a Grace Period above, the Grace Period shall begin on
and include the date the Investors receive the notice referred to in clause (i)
and shall end on and include the later of the date the Investors receive the
notice referred to in clause (ii) and the date referred to in such notice. The
provisions of Section 2(f) hereof shall not be applicable during the period of
any Allowable Grace Period. Upon expiration of the Grace Period, the Company
shall again be bound by the first sentence of Section 3(f) with respect to the
information giving rise thereto unless such material non-public information is
no longer applicable. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of an Investor in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which an Investor has entered into a contract for sale prior to the
Investor’s receipt of the notice of a Grace Period and for which the Investor
has not yet settled.
 
s. The Company shall use its best efforts to maintain the eligibility of its
registration statement on Form S-3 so that it is available for the registration
of the resale of Registrable Securities.
 
4. Obligations of the Investors.
 
a. At least five Business Days prior to the first anticipated filing date of a
Registration Statement other than the initial Registration Statement, the
Company shall notify each Investor in writing of the information the Company
requires from each such Investor if such Investor elects to have any of such
Investor’s Registrable Securities included in such Registration Statement. It
shall be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Investor that such Investor furnish to the Company
such information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the effectiveness of the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request.
 
b. Each Investor, by such Investor’s acceptance of the Registrable Securities,
agrees to cooperate with the Company as reasonably requested by the Company in
connection with the preparation and filing of any Registration Statement
hereunder, unless such Investor has notified the Company in writing of such
Investor’s election to exclude all of such Investor’s Registrable Securities
from such Registration Statement.
 
c. Each Investor agrees that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(f), such Investor will
immediately discontinue disposition of Registrable Securities pursuant to any
Registration Statement(s) covering such Registrable Securities until such
Investor’s receipt of notice that the supplemented or amended prospectus
contemplated by Section 3(f) has been filed with the SEC or receipt of notice
that no supplement or amendment is required. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended
shares of Common Stock to a transferee of an Investor in accordance with the
terms of the Securities Purchase Agreement in connection with any sale of
Registrable Securities with respect to which an Investor has entered into a
contract for sale prior to the Investor’s receipt of a notice from the Company
of the happening of any event of the kind described in Section 3(f) and for
which the Investor has not yet settled.
 

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d. Each Investor covenants and agrees that it will comply with the prospectus
delivery requirements of the 1933 Act as applicable to it or an exemption
therefrom in connection with sales of Registrable Securities pursuant to the
Registration Statement.
 
5. Expenses of Registration.
 
All reasonable expenses, other than underwriting discounts and commissions,
incurred in connection with registrations, filings or qualifications pursuant to
Sections 2 and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company and Legal Counsel, up to a maximum of $5,000 each per
Legal Counsel, shall be paid by the Company.
 
6. Indemnification.
 
In the event any Registrable Securities are included in a Registration Statement
under this Agreement:
 
a. To the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend each Investor, the directors, officers,
members, partners, employees, agents, representatives of, and each Person, if
any, who controls any Investor within the meaning of the 1933 Act or the 1934
Act (each, an “Indemnified Person”), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’
fees, amounts paid in settlement or expenses, joint or several, (collectively,
“Claims”) incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified Damages”), to which any of them
may become subject insofar as such Claims (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon: (i)
any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or any post-effective amendment thereto or in any filing
made in connection with the qualification of the offering under the securities
or other “blue sky” laws of any jurisdiction in which Registrable Securities are
offered (“Blue Sky Filing”), or the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in the light of the circumstances under which the statements therein
were made, not misleading, (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement or (iv) any violation of this Agreement (the matters in
the foregoing clauses (i) through (iv) being, collectively, “Violations”).
Subject to Section 6(c), the Company shall reimburse the Indemnified Persons,
promptly as such Indemnified Damages are incurred and are due and payable, for
any legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in strict
conformity with information furnished in writing to the Company by such
Indemnified Person expressly for use in the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Company to such Indemnified Person pursuant to Section 3(c);
and (ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.
 

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b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to severally and not jointly indemnify,
hold harmless and defend, to the same extent and in the same manner as is set
forth in Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (each, an
“Indemnified Party”), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in strict conformity with written
information furnished to the Company by such Investor expressly for use in the
Registration Statement; and, subject to Section 6(c), such Investor will
reimburse any legal or other expenses reasonably incurred by an Indemnified
Party in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Investor
shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds received by such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
 
c. Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action or proceeding
(including any governmental action or proceeding) involving a Claim, such
Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is
to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In the case of an
Indemnified Person, legal counsel referred to in the proviso of the immediately
preceding sentence shall be selected by the Investors holding at least a
majority in interest of the Registrable Securities included in the Registration
Statement to which the Claim relates. The Indemnified Party or Indemnified
Person 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 or Indemnified Person that relates to such action or
Claim. The indemnifying party shall keep the Indemnified Party or Indemnified
Person reasonably apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent, provided, however, that the indemnifying party shall
not unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the prior written consent of the Indemnified Party or Indemnified
Person, consent to entry of any judgment or enter into any settlement or other
compromise that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of a
release from all liability in respect to such Claim or litigation, and such
settlement shall not include any admission as to fault on the part of the
Indemnified Party. Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party or
Indemnified Person with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is materially prejudiced in its
ability to defend such action.
 

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d. The indemnification required by this Section 6 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 Indemnified Damages are incurred.
 

 
e. The indemnity agreements contained herein shall be in addition to (i) any
cause of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
 
7. Contribution.
 
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that: (i) no Person
involved in the sale of Registrable Securities that is guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in
connection with such sale shall be entitled to contribution from any Person
involved in such sale of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities pursuant to such Registration
Statement.
 
8. Reports Under the 1934 Act.
 
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration (“Rule 144”), the Company agrees to:
 
a. make and keep public information available, as those terms are understood and
defined in Rule 144;
 
b. file with the SEC in a timely manner all reports and other documents required
of the Company under the 1933 Act and the 1934 Act so long as the Company
remains subject to such requirements and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
 
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company, if
true, that it has complied with the reporting requirements of Rule 144, the 1933
Act and the 1934 Act, and (ii) such other information as may be reasonably
requested to permit the Investors to sell such securities pursuant to Rule 144
without registration.
 

 
9. Assignment of Registration Rights.
 
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of such Investor’s Registrable
Securities if: (i) the Investor agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is furnished to the
Company within a reasonable time after such assignment; (ii) the Company is,
within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such transferee or assignee, and
(b) the securities with respect to which such registration rights are being
transferred or assigned; (iii) immediately following such transfer or assignment
the further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act or applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.
 

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10. Amendment of Registration Rights.
 
Provisions of this Agreement may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Required
Holders. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No amendment shall be effective against any holder of
Registrable Securities without the consent of such holder if such amendment
adversely effects the rights of such holder hereunder. No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of this Agreement unless the same consideration also is
offered to all of the parties to this Agreement.
 
11. Miscellaneous.
 
a. A Person is deemed to be a holder of Registrable Securities whenever such
Person owns or is deemed to own of record such Registrable Securities. If the
Company receives conflicting instructions, notices or elections from two or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the record
owner of such Registrable Securities.
 
b. Any notices, consents, waivers or other communications required or permitted
to be given under the terms of this Agreement must be in writing and will be
deemed to have been delivered: (i) upon receipt, when delivered personally; (ii)
upon receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one Business Day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
 
If to the Company:
 
Nestor, Inc.
42 Oriental Street
Providence, RI 02908
Telephone: (401) 274-5658
Facsimile: (401) 274-5707
Attention: Benjamin M. Alexander, Esq.

With a copy to:

Hinckley, Allen & Snyder LLP
50 Kennedy Plaza, Suite 1500
Providence, RI 02903
Telephone: (401) 274-2000
Facsimile: (401) 277-9600
Attention: Margaret D. Farrell, Esq.

If to Legal Counsel:

Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103
Telephone: (215) 988-2880
Facsimile: (215) 988-2757
Attention: Stephen T. Burdumy, Esq.

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and

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000s
Facsimile: (212) 593-5955
Attention: Eleazer N. Klein, Esq.

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers attached hereto, with copies to such Buyer’s representatives as set forth
on the Schedule of Buyers, or to such other address and/or facsimile number
and/or to the attention of such other Person as the recipient party has
specified by written notice given to each other party five days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
 
c. Failure of any party to exercise any right or remedy under this Agreement or
otherwise, or delay by a party in exercising such right or remedy, shall not
operate as a waiver thereof.
 
d. All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
Borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.
 
e. This Agreement, the other Transaction Documents (as defined in the Securities
Purchase Agreement) and the instruments referenced herein and therein constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the other Transaction Documents and the instruments referenced herein
and therein supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.
 
f. Subject to the requirements of Section 9, this Agreement shall inure to the
benefit of and be binding upon the permitted successors and assigns of each of
the parties hereto.
 

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g. The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
 
h. This Agreement may be executed in identical counterparts, each of which shall
be deemed an original but all of which shall constitute one and the same
agreement. This Agreement, once executed by a party, may be delivered to the
other party hereto by facsimile transmission of a copy of this Agreement bearing
the signature of the party so delivering this Agreement.
 
i. Each party shall do and perform, or cause to be done and performed, all such
further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
 
j. All consents and other determinations required to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by the Required Holders.
 
k. The language used in this Agreement will be deemed to be the language chosen
by the parties to express their mutual intent and no rules of strict
construction will be applied against any party.
 
l. This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person, except to the extent
set forth in Section 6.
 
m. The obligations of each Investor hereunder are several and not joint with the
obligations of any other Investor, and no provision of this Agreement is
intended to confer any obligations on any Investor vis-à-vis any other Investor.
Nothing contained herein, and no action taken by any Investor hereto, shall be
deemed to constitute the Investors as a partnership, an association, a joint
venture or any other kind of entity or group, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated herein.
 

[Signature Page Follows]
 

 

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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.
 

 

 
COMPANY:
         
NESTOR, INC.
   
By:
 /s/Nigel P. Hebborn   Nigel P. Hebborn    CFO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
[Signature Page to Registration Rights Agreement]
 

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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.
 

 
BUYERS:
 
 Radcliffe SPC, Ltd. for and on behalf of the Class A
   Convertible Crossover Segregated Portfolio    By:  RG Capital Management,
L.P.    By:  RGC Management Company, LLC      
 
   
By:
 /s/ Gerald F. Stahlecker  
Name: Gerald F. Stahlecker
 
Title: Managing Director
       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
[Signature Page to Registration Rights Agreement]
 

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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Registration Rights Agreement to be duly executed as of
the date first written above.
 

 
OTHER BUYERS:
      LBI Group, Inc.    
By:
 /s/Eric C. Salzman  
Name: Eric C. Salzman
 
Title: SVP

 

   Kamunting Street Master Fund, Ltd.    
By:
 /s/Gregor T. Dannagher  
Name: Gregor T. Dannagher
 
Title: Director of Research
 Kamunting Street Capital Management, LP  as Investment Manager for Kamunting
Street Master Fund, Ltd.

By:
 /s/ Oliver C. Dobbs  
Name: Oliver C. Dobbs
 
Title: Authorized Signatory

 

  Capital Ventures International  
By:  Heights Capital Management, the authorized agent
   
By:
/s/Martin Kobinger  
Name: Martin Kobinger
 
Title: Investment Manager

 Evolution Master Fund Ltd. SPC Segregated Portfolio M.    
By:
 /s/ Adrian Brindle  
Name:  Adrian Brindle
 
Title: Director

 

 Highbridge International LLC  
by:  Highbridge Capital Management, LLC
   
By:
 /s/ Adam J. Chill  
Name: Adam J. Chill
 
Title: Managing Director

 

 Dolphin Offshore Partners, L.P.    
By:
 /s/ Peter E. Salas  
Name: Peter E. Salas
 
Title: General Partner

 
[Signature Page to Registration Rights Agreement]
 
 
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EXHIBIT A
 
SELLING STOCKHOLDERS
 
The shares of common stock being offered by the selling stockholders consists of
the shares of common stock issuable upon conversion of the notes and issuable
upon exercise of the warrants. For additional information regarding the issuance
of the notes and warrants, see “Private Placement of Notes and Warrants” above.
We are registering the shares of common stock in order to permit the selling
stockholders to offer the shares for resale from time to time. Except for the
ownership of the notes and the warrants issued pursuant to the Securities
Purchase Agreement, the selling stockholders have not had any material
relationship with us within the past three years.
 
The table below lists the selling stockholders and other information regarding
the beneficial ownership of the shares of common stock by each of the selling
stockholders. The second column lists the number of shares of common stock
beneficially owned by each selling stockholder, based on its ownership of the
notes and warrants issued pursuant to the Securities Purchase Agreement, as of
________, 200_, assuming conversion of the notes and exercise of the warrants
held by the selling stockholders on that date, after giving effect to certain
limitations included in the notes and the warrants, which are discussed below.
As a result of these limitations, the beneficial ownership information for
certain of the selling stockholders reflects the maximum number of shares that
are beneficially owned by those selling stockholders after giving effect to
these provisions and such beneficial ownership information does not include all
of the shares that may be sold by such selling stockholders pursuant to this
prospectus. The third column lists the shares of common stock being offered by
this prospectus by the selling stockholders.
 
In accordance with the terms of registration rights agreements with the selling
stockholders, this prospectus generally covers the resale of at least 120% of
the number of shares of common stock issuable upon conversion of the notes and
exercise of the related warrants as of the trading day immediately preceding the
date the registration statement is initially filed with the SEC. Because the
conversion price of the notes and the exercise price of the warrants may be
adjusted in certain circumstances, the number of shares that will actually be
issued may be more or less than the number of shares being offered by this
prospectus. The fourth column assumes the sale of all of the shares offered by
the selling stockholders pursuant to this prospectus.
 
Under the terms of the notes and the warrants, a selling stockholder may not
convert the notes or exercise the warrants to the extent such conversion or
exercise would cause such selling stockholder, together with its affiliates, to
beneficially own a number of shares of common stock which would exceed 4.99% of
our then outstanding shares of common stock following such conversion or
exercise, excluding for purposes of such determination shares of common stock
issuable upon conversion of the notes or exercise of the warrants that have not
been exercised. The selling stockholders may sell all, some or none of their
shares in this offering. See “Plan of Distribution.”
 

--------------------------------------------------------------------------------

 
Name of Selling Stockholder
Number of Shares Beneficially Owned Prior to Offering
Maximum Number of Shares
to be Sold Pursuant to this Prospectus
Number of Shares Owned After Offering
Radcliffe SPC, Ltd.
for and on behalf of the Class A Convertible Crossover Segregated Portfolio
   
0
LBI Group, Inc.
   
0
Kamunting Street Master Fund, Ltd.
   
0
Tribeca Global Convertible Investments Limited
   
0
Capital Ventures International
   
0
Evolution Master Fund Ltd. SPC, Segregated Portfolio M
   
0
Smithfield Fiduciary, LLC
   
0
Dolphin Offshore Partners, L.P.
   
0

 
(1) [  ]
 

 

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PLAN OF DISTRIBUTION
 
We are registering the shares of common stock issuable upon conversion of the
notes and the shares of common stock issuable upon exercise of the warrants to
permit the resale of these shares of common stock by the holders of the notes
and warrants from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling stockholders of the
shares of common stock.
 
The selling stockholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
 

 
•
on any national securities exchange or quotation service on which the securities
may be listed or quoted at the time of sale;

 

 
•
in the over-the-counter market;

 

 
•
in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

 

 
•
through the writing of options, whether such options are listed on an options
exchange or otherwise;

 

 
•
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

 

 
•
block trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction;

 

 
•
purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

 

 
•
an exchange distribution in accordance with the rules of the applicable
exchange;

 

 
•
privately negotiated transactions;

 

 
•
short sales;

 

 
•
sales pursuant to Rule 144;

 

 
•
broker-dealers may agree with the selling securityholders to sell a specified
number of such shares at a stipulated price per share;

 

 
•
a combination of any such methods of sale; and

 

 
•
any other method permitted pursuant to applicable law.

 
If the selling stockholders effect such transactions by selling shares of common
stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of common stock or otherwise, the selling stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The selling stockholders may also sell shares of common stock short and
deliver shares of common stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
selling stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
 

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The selling stockholders may pledge or grant a security interest in some or all
of the warrants or notes owned by them and, if they default in the performance
of their secured obligations, the pledgees or secured parties may offer and sell
the shares of common stock from time to time pursuant to this prospectus or any
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act of 1933, as amended, amending, if necessary, the list of
selling stockholders to include the pledgee, transferee or other successors in
interest as selling stockholders under this prospectus. The selling stockholders
also may transfer and donate the shares of common stock in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this prospectus.
 
The selling stockholders and any broker-dealer participating in the distribution
of the shares of common stock may be deemed to be “underwriters” within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the shares of common stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of common stock being offered and the terms of the offering, including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.
 
Under the securities laws of some states, the shares of common stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of common stock may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
 
There can be no assurance that any selling stockholder will sell any or all of
the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
 
The selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, to the extent applicable Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of the shares of common stock by
the selling stockholders and any other participating person. To the extent
applicable Regulation M may also restrict the ability of any person engaged in
the distribution of the shares of common stock to engage in market-making
activities with respect to the shares of common stock. All of the foregoing may
affect the marketability of the shares of common stock and the ability of any
person or entity to engage in market-making activities with respect to the
shares of common stock.
 
We will pay all expenses of the registration of the shares of common stock
pursuant to the registration rights agreements, estimated to be $[ ] in total,
including, without limitation, Securities and Exchange Commission filing fees
and expenses of compliance with state securities or “blue sky” laws; provided,
however, that a selling stockholder will pay all underwriting discounts and
selling commissions, if any. We will indemnify the selling stockholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling stockholders will be
entitled to contribution. We may be indemnified by the selling stockholders
against civil liabilities, including liabilities under the Securities Act, that
may arise from any written information furnished to us by the selling
stockholder specifically for use in this prospectus, in accordance with the
related registration rights agreements, or we may be entitled to contribution.
 
Once sold under the shelf registration statement, of which this prospectus forms
a part, the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.
 

 

-2-

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EXHIBIT B

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Transfer Agent]
[Address]
Attention:

Re: Nestor, Inc.

Ladies and Gentlemen:

[We are][I am] counsel to Nestor, Inc., a Delaware corporation (the “Company”),
and have represented the Company in connection with that certain Securities
Purchase Agreement (the “Securities Purchase Agreement”) entered into by and
among the Company and the buyers named therein (collectively, the “Holders”)
pursuant to which the Company issued to the Holders shares of its common stock,
par value $.01 per share (the “Shares”). Pursuant to the Securities Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Holders (the “Registration Rights Agreement”) pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement) under the Securities Act of 1933,
as amended (the “1933 Act”). In connection with the Company’s obligations under
the Registration Rights Agreement, on ____________ ___, 200_, the Company filed
a Registration Statement on Form S-3 (File No. 333-_____________) (the
“Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) relating to the Registrable Securities which names each of the Holders as
a selling stockholder thereunder.
 
In connection with the foregoing, [we][I] advise you that a member of the SEC’s
staff has advised [us][me] by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no
knowledge, after telephonic inquiry of a member of the SEC’s staff, that any
stop order suspending its effectiveness has been issued or that any proceedings
for that purpose are pending before, or threatened by, the SEC and the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.
 
This letter shall serve as our standing opinion to you that the shares of Common
Stock are freely transferable by the Holders pursuant to the Registration
Statement. You need not require further letters from us to effect any future
legend-free issuance or reissuance of shares of Common Stock to the Holders as
contemplated by the Company’s Irrevocable Transfer Agent Instructions dated
________ __, 2006.
 

 

 
Very truly yours,
               
By:
   
Name:
 
Title:
       

 

 
CC: [LIST NAMES OF HOLDERS]
 
 

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