Exhibit 10.1
 
 
SECURED CREDIT FACILITY AND WARRANT PURCHASE AGREEMENT
by and between
ENVIRONMENTAL TECTONICS CORPORATION
and
H.F. LENFEST
Dated as of
April 24, 2009
 
 

 

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TABLE OF CONTENTS

              RECITALS     1   ARTICLE I DEFINITIONS     1  
1.1
  Certain Definitions     1  
1.2
  Accounting Principles     12  
1.3
  Other Definitional Provisions; Construction     12   ARTICLE II ISSUE AND SALE
OF SECURITIES     12  
2.1
  Authorization, Advances, Issuance and Purchase of Notes     12  
2.2
  Lender Guaranties     14  
2.3
  Authorization, Issuance and Purchase of the Warrants     15  
2.4
  Sale and Purchase     16  
2.5
  Issue Price     16  
2.6
  The Closing     16  
2.7
  2009 Bridge Note     16   ARTICLE III REPAYMENT OF THE NOTES; EXCHANGE OF
EXISTING SECURITIES     16  
3.1
  Interest     16  
3.2
  Repayment of the Initial Note     17  
3.3
  Repayment of the Additional Notes     17  
3.4
  Maturity; Surrender, etc     17  
3.5
  Exchange of Existing Securities     17   ARTICLE IV CONDITIONS     18  
4.1
  Conditions to the Purchase of the Securities     18  
4.2
  Waiver     21   ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BORROWER    
21  
5.1
  Representations and Warranties of the Borrower     21   ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS OF LENDER     29  
6.1
  Authorization; Enforceable Obligations     29  
6.2
  No Breach     29  
6.3
  Governmental Approvals     29  
6.4
  Restricted Securities     29  
6.5
  Legends; Lender’s Representations     29  
6.6
  Reliance on Exemptions     30  

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6.7
  Prohibition on Short Sales     30  
6.8
  Transfer of Notes     30  
6.9
  Replacement of Lost Securities     30   ARTICLE VII COVENANTS     31  
7.1
  Affirmative Covenants     31  
7.2
  Negative Covenants     35  
7.3
  Financial Covenant     39   ARTICLE VIII EVENTS OF DEFAULT     39  
8.1
  Events of Default     39  
8.2
  Consequences of Event of Default     41  
8.3
  Security     41   ARTICLE IX MISCELLANEOUS     41  
9.1
  Survival     41  
9.2
  Successors and Assigns     42  
9.3
  Modifications and Amendments     42  
9.4
  No Implied Waivers; Cumulative Remedies; Writing Required     42  
9.5
  Reimbursement of Expenses     42  
9.6
  Holidays     42  
9.7
  Notices     42  
9.8
  Governing Law and Consent to Jurisdiction     43  
9.9
  Severability     44  
9.10
  Headings     44  
9.11
  Counterparts     44  
9.12
  Integration     44  
9.13
  Subordination     44  
9.14
  Indemnification     44  
9.15
  Waiver of Jury Trial     45  
9.16
  Confession of Judgment     45   SIGNATURE PAGE     47   ANNEXES     48  
SCHEDULES     48   EXHIBITS     48  

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SECURED CREDIT FACILITY AND WARRANT PURCHASE AGREEMENT
     THIS SECURED CREDIT FACILITY AND WARRANT PURCHASE AGREEMENT (this
“Agreement”), dated as of April 24, 2009, is made by and between Environmental
Tectonics Corporation, a Pennsylvania corporation (the “Borrower”), and H.F.
Lenfest (the “Lender”). Capitalized terms used and not defined elsewhere in this
Agreement are defined in Article 1 hereof.
RECITALS
     WHEREAS, the Borrower is in need of additional funds in order to meet the
Borrower’s working capital requirements;
     WHEREAS, the Borrower has requested that the Lender make available to the
Borrower a secured line of credit facility in the principal amount of up to
$7,500,000 and the collateralized guaranty of an additional $5,000,000 of Senior
Debt, with the proceeds of each to be used for, in addition to transaction
expenses, working capital and general corporate purposes directly related to the
growth of the business of the Borrower and the performance of one or more Major
Contracts; and the Lender has agreed to make such funds and/or guaranties
available to the Borrower on the terms and conditions set forth herein; and
     WHEREAS, on February 20, 2009, pursuant to a Secured Promissory Note (the
“2009 Bridge Note”) and Common Stock Warrant executed by the Borrower, the
Lender deposited $2,000,000 in a restricted bank account of the Borrower, which
funds shall be deemed part of the $7,500,000 for purposes of this Agreement and
are to be used solely in connection with working capital funding to support the
Borrower’s bid on, and if successful its performance under, one of the Major
Contracts.
     NOW, THEREFORE, the parties hereto, in consideration of the foregoing
premises and their mutual covenants and agreements herein set forth and
intending to be legally bound hereby, covenant and agree as follows:
ARTICLE I
DEFINITIONS
     1.1 Certain Definitions. In addition to other words and terms defined
elsewhere in this Agreement, the following words and terms shall have the
meanings set forth below (and such meanings shall be equally applicable to both
the singular and plural form of the terms defined, as the context may require):
     “2003 Note” shall mean that certain Senior Subordinated Convertible Note,
dated as of February 18, 2003, issued by the Borrower to the Lender in the
original principal amount of $10,000,000.
     “2009 Bridge Note” shall have the meaning assigned to such term in the
Recitals hereof.

 

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     “2009 Bridge Loan Documents” shall have the meaning assigned to such term
in Section 2.7 hereof.
     “Additional Personal Guaranty” shall have the meaning assigned to such term
in Section 2.2(a).
     “Additional Note” shall have the meaning assigned to such term in
Section 2.1(c).
     “Additional Note Maturity Date” shall have the meaning assigned to such
term in Section 3.3.
     “Additional Warrant” shall have the meaning assigned to such term in
Section 2.3(b).
     “Advance” or “Advances” shall mean a cash advance or cash advances under
the line of credit facility provided pursuant to the terms of this Agreement.
     “Affiliate” shall mean with respect to any Person, any other Person that is
directly or indirectly controlling, controlled by or under common control with
such Person or entity or any of its Subsidiaries, and the term “control”
(including the terms “controlled by” and “under common control with”) means
having, directly or indirectly, the power to direct or cause the direction of
the management and policies of a Person, whether through ownership of voting
securities or by contract or otherwise. Without limiting the foregoing, the
ownership of ten percent (10%) or more of the voting securities of a Person
shall be deemed to constitute control. Notwithstanding anything contained herein
to the contrary, neither the Lender nor any of his respective Affiliates shall
be deemed to be Affiliates of the Borrower by virtue of the transactions
contemplated by this Agreement.
     “Agreement” shall mean this Secured Credit Facility and Warrant Purchase
Agreement, as the same may be amended, restated, supplemented or otherwise
modified from time to time.
     “Annual Guaranty Shares” shall have the meaning assigned to such term in
Section 2.2(a).
     “Borrower” shall have the meaning assigned to such term in the preamble
hereto.
     “Business” shall mean the principal business of the Borrower as set forth
in Section 5.1(d) herein and as such shall continue to be conducted following
the purchase and sale of the Securities.
     “Business Day” shall mean any day other than a Saturday, Sunday or other
day on which banking institutions in the Commonwealth of Pennsylvania are
authorized or required by law to close.
     “Bylaws” shall mean the bylaws of the Borrower and the Guarantor, including
all amendments and supplements thereto.
     “Capital Lease” shall mean a lease with respect to which the lessee is
required to recognize the acquisition of an asset and the incurrence of a
liability in accordance with GAAP.

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     “Capital Lease Obligation” shall mean at any time, the amount of the
obligations of a Person under Capital Leases which would be shown at such time
as a liability on a Consolidated balance sheet of such Person prepared in
accordance with GAAP.
     “CERCLA” shall mean the Comprehensive Environmental Response, Compensation
and Liability Act (42 U.S.C. § 9601, et seq.), as amended, and all rules,
regulations, standards guidelines and publications issued thereunder.
     “Charter Documents” shall mean the Articles of Incorporation of the
Borrower and the Articles of Incorporation or Certificate of Incorporation, as
the case may be, of the Guarantor, including all amendments and supplements
thereto.
     “Closing” shall mean a closing of the purchase and sale of the Securities
pursuant to this Agreement and shall include the Initial Closing and any
subsequent Closing.
     “Closing Date” shall mean the date and time for delivery of each of the
Notes as finally determined pursuant to Section 2.6 hereof.
     “Code” shall mean the Internal Revenue Code of 1986, as amended.
     “Common Stock” shall mean shares of common stock, par value $0.05 per
share, of the Borrower.
     “Compliance Certificate” shall have the meaning assigned to such term in
Section 7.1(f)(ii).
     “Consolidated” or “consolidated” shall mean with reference to any term
defined herein, that term as applied to the accounts of the Borrower and its
Subsidiaries, consolidated in accordance with GAAP.
     “Consolidated Tangible Net Worth” shall mean as of any date of
determination, an amount equal to (a) the aggregate amount of all assets of the
Borrower and its Subsidiaries on a consolidated basis at such date as may be
properly classified as such in accordance with GAAP, excluding such other assets
as are properly classified as intangible assets under GAAP, minus (b) the
aggregate amount of all liabilities of the Borrower and its Subsidiaries and
minority interests in the Borrower or any of its Subsidiaries on a consolidated
basis at such date, as may be properly classified as such in accordance with
GAAP, plus (c) the outstanding balances under the 2003 Note, the 2009 Bridge
Note and the Notes.
     “Contingent Obligation” shall mean as to any Person, without duplication,
any guarantee of payment or performance by such Person of any Indebtedness or
other obligation of any other Person, or any agreement to provide financial
assurance with respect to the financial condition, or the payment of the
obligations of, such other Person (including, without limitation, purchase or
repurchase agreements, reimbursement agreements with respect to letters of
credit or acceptances, indemnity arrangements, grants of security interests to
support the obligations of another Person, keep well agreements and take-or-pay
or through-put arrangements) which has the effect of assuring or holding
harmless any third Person against loss with respect to one or more obligations
owed to such third Person;

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provided, however, the term Contingent Obligation shall not include endorsements
of instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation of any Person shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made and (b) the
maximum amount for which such contingently liable Person may be liable pursuant
to the terms of the instrument embodying such Contingent Obligation, unless such
primary obligation and the maximum amount for which such contingently liable
Person may be liable are not stated or determinable, in which case the amount of
such Contingent Obligation shall be such contingently liable Person’s maximum
reasonably anticipated liability in respect thereof as determined by such Person
in good faith.
     “Contractual Obligation” shall mean as to any Person, any provision of any
security issued by or operating agreement or organizational or formation
documents of such Person or any provision of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
     “Credit Facility” shall mean the loan in the aggregate principal amount of
up to $7,500,000 (including the principal amount of the 2009 Bridge Note) to be
made to the Borrower by the Lender hereunder, subject to the terms and
conditions set forth herein.
     “Default” shall mean any event or condition that, but for the giving of
notice or the lapse of time, or both, would constitute an Event of Default.
     “Drawdown Request” shall have the meaning assigned to such term in
Section 2.1(c).
     “Environmental Laws” shall mean any Laws that address, are related to or
otherwise are concerned with environmental, health or safety issues, including,
without limitation, any Laws relating to any emissions, releases or discharges
of Pollutants into ambient air, surface water, ground water or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, handling, clean-up or control of Pollutants or any
exposure or impact on worker health and safety.
     “Environmental Liabilities” shall mean any obligations or liabilities
(including, without limitation, any claims, suits or other assertions of
obligations or liabilities) that are:
     (a) related to environmental, health or safety issues (including, without
limitation, on-site or off-site contamination by Pollutants of surface or
subsurface soil or water, and occupational safety and health); and
     (b) based upon or related to (i) any provision of past, present or future
United States or foreign Environmental Law (including, without limitation,
CERCLA and RCRA) or common law, or (ii) any judgment, order, writ, decree,
permit or injunction imposed by any court, administrative agency, tribunal or
otherwise.
The term “Environmental Liabilities” includes among other things, all:
(i) fines, penalties, judgments, awards, settlements, losses, damages, costs,
fees (including, without limitation, attorneys’ and consultants’ fees), expenses
and disbursements; (ii) defense and other responses to

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any administrative or judicial action (including, without limitation, claims,
notice letters, complaints, and other assertions of liability); and
(iii) financial responsibility for (1) cleanup costs and injunctive relief,
including any Removal, Remedial or other Response actions, and natural resource
damages, and (2) any other compliance or remedial measures.
     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as
the same may from time to time be amended, and the rules and regulations of any
governmental agency or authority, as from time to time may be in effect,
promulgated thereunder.
     “Event of Default” shall mean any of the events of default described in
Section 8.1 hereof.
     “Executive Officer” shall mean the chief executive officer, the president,
the chief financial officer, and the chief operating officer of the Borrower and
the Guarantor, as applicable.
     “Financing Statements” shall have the meaning assigned to such term in
Section 4.1(e)(i) hereof.
     “Fiscal Quarter” or “fiscal quarter” shall mean during each Fiscal Year of
the Borrower, each three-month fiscal period that ends at the end of May,
August, November and February, as designated in such respective year.
     “Fiscal Year” or “fiscal year” shall mean each twelve-month period ending
on the last Friday in February.
     “Form 10-K” shall have the meaning assigned to such term in Section 5.1(e)
hereof.
     “Form 10-Q” shall have the meaning assigned to such term in Section 5.1(e)
hereof.
     “GAAP” shall have the meaning assigned to such term in Section 1.2 hereof.
     “Governmental Approvals” shall have the meaning assigned to such term in
Section 5.1(aa) hereof.
     “Governmental Authorities” shall mean any nation or government, any state
or other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
     “Guarantor” shall mean Entertainment Technology Corporation, a Pennsylvania
corporation, and each other Subsidiary of the Borrower that at any time
hereafter is formed, created or acquired, or has any assets or operations if
formed prior to the date hereof, and their respective successors and permitted
assigns.
     “Guaranty” shall mean any guaranty of the payment or performance of any
Indebtedness or other obligation and any other arrangement whereby credit is
extended to one obligor on the basis of any promise of another Person, whether
that promise is expressed in terms of an obligation to pay the Indebtedness of
such obligor, or to purchase an obligation owed by such

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obligor, or to purchase goods and services from such obligor pursuant to a
take-or-pay contract, or to maintain the capital, working capital, solvency or
general financial condition of such obligor, whether or not any such arrangement
is reflected on the balance sheet of such other Person, firm or corporation, or
referred to in a footnote thereto, but shall not include endorsements of items
for collection in the ordinary course of business. For the purpose of all
computations made under this Agreement, the amount of a Guaranty in respect of
any obligation shall be deemed to be equal to the maximum aggregate amount of
such obligation or, if the Guaranty is limited to less than the full amount of
such obligation, the maximum aggregate potential liability under the terms of
the Guaranty.
     “Guaranty Agreement” shall mean the Guaranty Agreement of even date
herewith executed and delivered by the Guarantor to the Lender, as the same may
be amended, modified, supplemented or restated from time to time hereafter.
     “Guaranty Share Issuance Date” shall have the meaning assigned to such term
in Section 2.2(a).
     “Guaranty Shares” shall have the meaning assigned to such term in
Section 2.2(a).
     “Guaranty Warrants” shall have the meaning assigned to such term in
Section 2.3(c).
     “Indebtedness” shall mean:
     (a) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current trade liabilities
incurred in the ordinary course of business and payable in accordance with
customary practices);
     (b) any other indebtedness which is evidenced by a note, bond, debenture or
similar instrument;
     (c) all Capital Lease Obligations of such Person;
     (d) all obligations of such Person in respect of outstanding letters of
credit, acceptances and similar obligations created for the account of such
Person;
     (e) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable for
the payment thereof;
     (f) all obligations of such Person with respect to interest rate protection
agreements (calculated on a basis satisfactory to the Lender and in accordance
with accepted practice); and
     (g) withdrawal liabilities of such Person or any Affiliate under a Plan.
     “Initial Closing” shall mean the closing of the purchase and sale of the
Initial Securities pursuant to this Agreement.

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     “Initial Closing Date” shall mean the date and time for delivery of the
Initial Securities as finally determined pursuant to Section 2.6 hereof.
     “Initial Guaranty Shares” shall have the meaning assigned to such term in
Section 2.2(a).
     “Initial Note” shall have the meaning assigned to such term in
Section 2.1(b).
     “Initial Note Maturity Date” shall have the meaning assigned to such term
in Section 3.2.
     “Initial Securities” shall mean the Initial Note, the Initial Warrant and
the shares of Series D Preferred Stock issuable in payment of origination fees
on the Credit Facility.
     “Initial Warrant” shall have the meaning assigned to such term in
Section 2.3(a).
     “Insolvency Proceeding” shall have the meaning assigned to such term in
Section 8.1(g).
     “Investment” as applied to any Person shall mean the amount paid or agreed
to be paid or loaned, advanced or contributed to other Persons, and in any event
shall include, without limitation, (i) any direct or indirect purchase or other
acquisition of any notes, obligations, instruments, stock, securities or
ownership interest (including, without limitation, partnership interests and
joint venture interests) and (ii) any capital contribution to any other Person.
     “Laws” shall mean all U.S. and foreign federal, state or local statutes,
laws, rules, regulations, ordinances, codes, decrees, binding agreements, rules
of common law, and the like, now or hereafter in effect, including, any judicial
or administrative interpretations thereof, and any judicial or administrative
orders, consents, decrees, judgments or rulings.
     “Lender” shall have the meaning assigned to such term in the preamble
hereto and in Section 6.5 hereof.
     “Lien” shall mean any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Capital Lease having
substantially the same economic effect as any of the foregoing).
     “Major Contract” shall mean a major contract entered into by the Borrower
and any third party that the Lender and the Borrower agree is a “Major Contract”
that is projected to be “profitable” using reasonable metrics consistent with
the Borrower’s projections on a historic basis.
     “Market Price” shall mean, as of any date, (i) the closing sale price for
the shares of Common Stock as reported on the NYSE AMEX LLC, the successor to
the American Stock Exchange (“AMEX”), by Bloomberg Financial Markets
(“Bloomberg”) for the trading day immediately preceding such date, or (ii) if
the AMEX is not the principal trading market for the

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shares of Common Stock, the average of the reported closing sale prices reported
by Bloomberg on the principal trading market for the Common Stock during the one
hundred twenty (120) period preceding such date, or (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Market Price
shall be determined in good faith by the Board of Directors.
     “Material Adverse Change” shall mean any set of circumstances or events
which (a) has or could reasonably be expected to have a material adverse effect
upon the validity or enforceability of this Agreement or any other Transaction
Document, (b) is or could reasonably be expected to be material and adverse to
the business, properties, assets, financial condition or results of operations
of the Borrower and its Subsidiaries taken as a whole, (c) impairs materially or
could reasonably be expected to impair materially the ability of the Borrower to
duly and punctually pay or perform its obligations under the Transaction
Documents, or (d) impairs materially or could reasonably be expected to impair
materially the ability of the Lender to enforce its legal remedies pursuant to
this Agreement and the other Transaction Documents.
     “Material Adverse Effect” shall mean an effect that results in or causes or
has a reasonable likelihood of resulting in or causing a Material Adverse
Change.
     “Maturity Date” shall have the meaning assigned to such term in Section 3.3
hereof.
     “Meeting” shall have the meaning assigned to such term in Section 7.1(m)
hereof.
     “Moody’s” shall have the meaning assigned to such term in Section 7.2(g)
hereof.
     “Mortgage” shall mean the Amended and Restated Open-End Mortgage and
Security Agreement, dated the date hereof, in the form attached hereto as
Exhibit H, encumbering and granting a second mortgage lien in favor of the
Lender on the Borrower’s real property at 125 James Way, Southampton,
Pennsylvania, as the same may be amended, supplemented or otherwise modified
from time to time.
     “Multiemployer Plan” shall mean a multiemployer plan (within the meaning of
Section 3(37) of ERISA) that is maintained for the benefit of the employees of
the Borrower.
     “Notes” shall have the meaning assigned to such term in Section 2.1.
     “Obligations” shall mean all debt, principal, interest, expenses, fees and
other amounts owed to the Lender by the Borrower pursuant to this Agreement or
any other agreements, whether absolute or continent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability or
obligation owing from the Borrower to any other Person that the Lender has
guaranteed or may have obtained by assignment or otherwise.
     “PBGC” shall mean the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA, or any other governmental agency,
department or instrumentality succeeding to the functions thereof.

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     “Permitted Indebtedness” shall have the meaning assigned to such term in
Section 5.1(c) hereof.
     “Permitted Liens” shall have the meaning assigned to such term in
Section 7.2(b) hereof.
     “Person” shall mean any individual, partnership, limited partnership,
corporation, limited liability company, association, joint stock company, trust,
joint venture, unincorporated organization or governmental entity or department,
agency or political subdivision thereof.
     “Personal Guaranty” shall have the meaning assigned to such term in
Section 2.2(a) hereof.
     “Plan” shall mean any employee benefit plan (within the meaning of
Section 3(3) of ERISA), other than a Multiemployer Plan, established or
maintained by the Borrower.
     “Pledge” shall have the meaning assigned to such term in Section 2.2(a)
hereof.
     “PNC Letter Agreement” shall mean that certain letter agreement, dated the
date hereof, by and among the Borrower, the Lender and the Senior Lender
pursuant to which the Senior Lender has agreed to amend the terms of the Senior
Credit Agreement.
     “Pollutant” shall include any “hazardous substance” and any “pollutant or
contaminant” as those terms are defined in CERCLA; any “hazardous waste” as that
term is defined in RCRA; and any “hazardous material” as that term is defined in
the Hazardous Materials Transportation Act (49 U.S.C. § 1801 et seq.), as
amended (including as those terms are further defined, construed, or otherwise
used in rules and regulations issued pursuant to, or otherwise in implementation
of, said Environmental Laws); and including, without limitation, any petroleum
product or byproduct, solvent, flammable or explosive material, radioactive
material, asbestos, polychlorinated biphenyls (PCBs), dioxins, dibenzofurans,
heavy metals, and radon gas; and including any other substance or material that
is reasonably determined by any Governmental Authority or pursuant to any Law to
present a threat, hazard or risk to human health or the environment.
     “Preferred Stock” shall mean shares of preferred stock, par value $0.05 per
share, of the Borrower.
     “Properties and Facilities” shall have the meaning assigned to such term in
Section 5.1(q).
     “Proprietary Rights” shall mean all patents, patents pending, trademarks,
trade names, service marks, copyrights, inventions, production methods,
licenses, formulas, technology, know-how, processes and trade secrets,
regardless of whether such are registered with any Governmental Authorities,
including applications therefor.
     “RCRA” shall mean the Resource Conservation and Recovery Act (42 U.S.C. §
6901 et seq.), as amended, and all rules and regulations issued thereunder.

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     “Registration Rights Agreement” shall have the meaning assigned to such
term in Section 4.1(e)(ii).
     “Removal,” “Remedial” and “Response” actions shall include the types of
activities covered by CERCLA, RCRA, and other comparable Environmental Laws, and
whether the activities are those which might be taken by a government entity or
those which a government entity or any other person might seek to require of
waste generators, handlers, distributors, processors, users, storers, treaters,
owners, operators, transporters, recyclers, reusers, disposers, or other persons
under “removal,” “remedial,” or other “response” actions.
     “Reportable Event” shall mean any of the events which are reportable under
Section 4043 of ERISA and the regulations promulgated thereunder, other than an
occurrence for which the thirty (30) day notice contained in 29 C.F.R. §
2615.3(a) is waived.
     “S&P” shall have the meaning assigned to such term in Section 7.2(g)
hereof.
     “SEC” shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
     “Securities” shall mean the Notes, the Guaranty Shares, the Warrants, the
Guaranty Warrants, the shares of Common Stock issuable upon exercise of the
Warrants and/or the Guaranty Warrants, the shares of Series D Preferred Stock
issuable in payment of origination fees and that may be issuable in payment of
interest on the Notes, and the shares of Series E Preferred Stock issuable in
conversion of and exchange for existing securities.
     “Securities Act” shall mean the Securities Act of 1933, as amended.
     “Securities Exchange Act” shall mean the Securities Exchange Act of 1934,
as amended.
     “Security Agreement” shall have the meaning assigned to such term in
Section 4.1(e)(i) hereof.
     “Security Documents” shall mean the Security Agreement, the Mortgage, the
Guaranty, the Financing Statements, and all other documents, instruments and
other materials necessary to create or perfect the security interests created
pursuant to the Security Agreement.
     “Senior Credit Agreement” shall mean that certain Credit Agreement by and
between the Borrower and PNC Bank, National Association, dated July 31, 2007,
and the collateral agreements thereto, as the same may be amended, modified,
supplemented, restated or refinanced from time to time, and any replacement
agreement with another Senior Lender as permitted hereunder.
     “Senior Debt” shall mean the outstanding obligations of the Borrower under
the Senior Financing and any other obligation that by its terms ranks senior to
the Indebtedness contemplated under this Agreement.
     “Senior Financing” shall mean all obligations, liabilities and indebtedness
of the Borrower to the Senior Lender, whether principal, interest, fees,
expenses, indemnification or

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otherwise under or in respect of a Senior Credit Agreement (including all
interest, charges, expenses, fees and other sums accruing after commencement of
any case, proceeding or other action relating to the bankruptcy, insolvency or
reorganization of the Borrower).
     “Senior Lender” shall collectively mean the bank party to the Senior Credit
Agreement, and any successor or assign thereto.
     “Series B Preferred Stock” shall mean shares of Series B convertible
preferred stock, par value $0.05 per share, of the Borrower, which has a stated
value of $1,000 per share.
     “Series C Preferred Stock” shall mean shares of Series C convertible
preferred stock, par value $0.05 per share, of the Borrower, which has a stated
value of $1,000 per share.
     “Series D Preferred Stock” shall mean shares of Series D convertible
preferred stock, par value $0.05 per share, of the Borrower, which has a stated
value of $1,000 per share.
     “Series E Preferred Stock” shall mean shares of Series E convertible
preferred stock, par value $0.05 per share, of the Borrower, which has a stated
value of $1,000 per share.
     “Shareholder Approval” shall mean such time as all of the following events
shall have occurred: (i) the affirmative vote of the shareholders of the
Borrower to restore in full the Lender’s voting rights on his Common Stock and
Preferred Stock in the Borrower, including any shares of Common Stock or
Preferred Stock issuable upon conversion or exercise of securities convertible
into or exercisable for Common Stock, which shall include any shares of
Preferred Stock and/or Common Stock that may be issued on conversion of
securities issued prior to the date hereof or as a result of this conversion;
(ii) the approval of all other necessary actions relating to the Transactions;
and (iii) the election of a slate of directors approved by the Lender.
     “Shareholder Meeting Date Deadline” shall mean July 2, 2009; provided,
however, that if the SEC provides any comments to the proxy statement that the
Borrower is filing in accordance with Section 7.1(l) hereof, the Shareholder
Meeting Date Deadline shall mean forty-five (45) days after the SEC comments are
resolved, but in no event later than August 13, 2009.
     “Shareholders Voting Agreement” shall have the meaning assigned to such
term in Section 4.1(e)(v).
     “Subordination Agreement” means that certain Second Amended and Restated
Subordination and Intercreditor Agreement, dated of even date herewith, among
the Lender, the Senior Lender and the Borrower.
     “Subsidiary” shall mean as to any Person, a corporation, partnership,
limited liability company or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such other
ownership interests having such power only be reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of
such corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified, all
references to a

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“Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary
or Subsidiaries of the Borrower.
     “Transaction Documents” shall mean this Agreement, the Notes, the Warrants,
the Guaranty Warrants, the Registration Rights Agreement, the Security Documents
and all other agreements, instruments and documents delivered in connection
therewith as any or all of the foregoing may be supplemented, amended or
restated from time to time.
     “Transactions” shall mean the incurrence of debt and the issuance of
securities and/or guaranties, as contemplated by this Agreement, the Notes, the
Warrants, the Guaranty Warrants, the other Transaction Documents and all other
agreements contemplated hereby and/or thereby.
     “UST” shall mean an underground storage tank, including as that term is
defined, construed and otherwise used in RCRA and in rules and regulations
issued pursuant to RCRA and comparable state and local laws.
     “Warrants” shall have the meaning assigned to such term in Section 2.3(b).
     1.2 Accounting Principles. The character or amount of any asset, liability,
capital account or reserve and of any item of income or expense to be
determined, and any consolidation or other accounting computation to be made,
and the construction of any definition containing a financial term, pursuant to
this Agreement shall be determined or made in accordance with generally accepted
accounting principles in the United States of America consistently applied
(“GAAP”), unless such principles are inconsistent with the express requirements
of this Agreement.
     1.3 Other Definitional Provisions; Construction. Whenever the context so
requires, neuter gender includes the masculine and feminine, the singular number
includes the plural and vice versa. The words “hereof” “herein” and “hereunder”
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not in any particular provision of this Agreement, and
references to section, article, annex, schedule, exhibit and like references are
references to this Agreement unless otherwise specified. A Default or Event of
Default shall “continue” or be “continuing” until such Default or Event of
Default has been cured, or waived by the Lender. References in this Agreement to
any Persons shall include such Persons, successors and permitted assigns. Other
terms contained in this Agreement (which are not otherwise specifically defined
herein) shall have meanings provided in Article 9 of the Pennsylvania Uniform
Commercial Code on the date hereof to the extent the same are used or defined
therein.
ARTICLE II
ISSUE AND SALE OF SECURITIES
     2.1 Authorization, Advances, Issuance and Purchase of Notes.
          (a) Subject to the terms and conditions set forth in this Agreement,
the Lender shall make Advances from time to time during the period from the date
hereof until December 31, 2010 in such sums as are set forth or determined in
accordance with this Section 2.1, provided that all such Advances shall not
exceed $7,500,000 in the aggregate (inclusive of the

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principal amount of the 2009 Bridge Note). Each Advance hereunder by the Lender
shall be memorialized by the issuance and sale by the Borrower to the Lender, at
a Closing, of a Note in the principal amount of the Advance. In addition, the
Borrower agrees to sell and issue to the Lender, and the Lender agrees to
purchase from the Borrower, at each Closing, a warrant to purchase shares of the
Company’s Common Stock on the terms provided herein. Interest shall be payable
at such times and in such amounts as provided herein and in the Notes in cash or
in shares of Series D Preferred Stock, at the option of the Lender, in his sole
discretion, to be provided in writing to the Borrower on an annual basis no
later than January 31st of each year. In the event the Lender elects to receive
interest payments in shares of Series D Preferred Stock, the number of shares of
Series D Preferred Stock shall be determined by dividing the amount of interest
due on an interest payment date by $1,000.00, the stated value of the Series D
Preferred Stock. As consideration to the Lender for making the Advances
available to the Borrower, in addition to the origination fee received by the
Lender in consideration of funding the 2009 Bridge Note, the Lender shall
receive an origination fee on the date of the Initial Closing equal to 1% of the
aggregate amount of the Credit Facility less the amount of the 2009 Bridge Note,
such origination fee to be payable to the Lender through the issuance to the
Lender of 55 shares of Series D Preferred Stock.
          (b) The Borrower has duly authorized the issuance and sale to the
Lender of, and the Lender has agreed to purchase subject to the terms and
conditions of this Agreement, on the Initial Closing Date, the Borrower’s Senior
Secured Subordinated Note in the original principal amount of $1,000,000 (the
“Initial Note”) to be substantially in the form attached hereto as Exhibit A-1,
such Initial Note to have an initial maturity date of that is five (5) Business
Days after the Shareholder Meeting Date Deadline and an interest rate of 15% per
annum; provided, however, that if the Shareholder Approval is received, then the
maturity date of the Initial Note shall be extended automatically until the date
that is three (3) years after the date of issuance of the Initial Note and the
interest rate on the Initial Note shall be reduced to 10% per annum
retroactively from the date of issuance.
          (c) To the extent that the Borrower requires working capital to
perform its obligations under any of the Major Contracts, including without
limitation to purchase necessary equipment and materials, prior to receiving
payment therefor from the customer of such Major Contract, at any time after the
date that such Major Contract is entered into by the Borrower and the customer
and prior to the Maturity Date, the Borrower may send notice to the Lender
requesting an Advance by the Lender under the Credit Facility (a “Drawdown
Request”), which Drawdown Request shall include (1) the date of the request;
(2) the principal amount requested, which amount shall be at least $500,000 but
not more than $2,500,000 (provided, however, that with respect to the Major
Contract to which the 2009 Bridge Note relates, the principal amount requested
may be any amount not exceeding $500,000, exclusive of the amount of the 2009
Bridge Note; and provided, further, that the aggregate principal amount of all
Drawdown Requests, exclusive of the amounts funded under the 2009 Bridge Note
and the Initial Note, shall not exceed $4,500,000); (3) a description of the
applicable Major Contract, including reasonable pro forma projections of its
profitability and how the proceeds of the Advance will be used by the Borrower
to perform the Major Contract; and (4) the date by which the Borrower requires
the additional funds. The Lender shall have ten (10) days in which to notify the
Borrower whether the Drawdown Request will be approved, which approval shall be
granted if and in the event that the conditions to borrowing set forth in
subsection (d) below are satisfied as determined in the

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sole discretion of the Lender. If the Drawdown Request has been approved by the
Lender, the Lender shall make the Advance requested and the Borrower shall issue
and sell to the Lender a senior secured subordinated promissory note in the
principal amount of the Advance on an Additional Closing Date (each an
“Additional Note” and together with the Initial Note, the “Notes”) until the
aggregate principal balance of all Notes is $7,500,000, inclusive of the
principal amount of the 2009 Bridge Note, such Notes to be substantially in the
form attached hereto as Exhibit A-2, to have a maturity date that is the earlier
of three (3) years from the date of issuance thereof and December 31, 2012 and
an interest rate of 10% per annum.
          (d) Notwithstanding anything to the contrary in the foregoing, in
order for the Borrower to be eligible to receive any Advances from the Lender
under the Credit Facility provided for herein, after the issuance of the Initial
Note, (i) the Borrower must have received the Shareholder Approval; (ii) the
Borrower must provide a Drawdown Request to the Lender that does not exceed
$2,500,000 and with all other Advances already extended does not exceed
$7,500,000, inclusive of the principal amount already extended under the 2009
Bridge Note; (iii) a Major Contract must have been awarded to the Borrower and
be in full force and effect, for which the Borrower needs the proceeds of the
requested Advance to perform; (iv) the conditions in Article IV hereof shall
have been satisfied by the Borrower or waived by the Lender in his sole
discretion; and (v) the Lender shall have determined in his sole discretion that
no Material Adverse Change has occurred.
     2.2 Lender Guaranties.
          (a) In connection with the Transaction and in accordance with the
terms of the PNC Letter Agreement, the Senior Lender has agreed to increase the
maximum principal amount of loans available to the Borrower under the Senior
Credit Agreement from $15,000,000 to $20,000,000 subject to the Lender agreeing
to continue to personally guarantee the Senior Debt including such increase (the
guaranty of such additional $5,000,000 is referred to herein as the “Additional
Personal Guaranty” and the entire amount guaranteed by the Lender is referred to
herein as the “Personal Guaranty”) and to pledge as collateral for the Personal
Guaranty cash, cash equivalents, marketable securities or other liquid assets
with a value of least $10,000,000 (the “Pledge”). At the request of the Borrower
and in accordance with the terms of the PNC Letter Agreement, the Lender has
agreed to provide the Additional Personal Guaranty and the Pledge if the
Borrower obtains the Shareholder Approval, provided that the Shareholder
Approval is obtained prior to the Shareholder Meeting Date Deadline. If and when
the Shareholder Approval is obtained and the maximum principal amount available
under the Senior Credit Agreement is so increased, the Lender shall promptly
execute and deliver signature pages to the Personal Guaranty and Pledge (the
forms of which are attached to the PNC Letter Agreement) and such other
agreements as may be reasonably requested by the Senior Lender in connection
with the transactions contemplated under the PNC Letter Agreement. In
consideration of providing the Additional Personal Guaranty and the Pledge, the
Borrower shall issue to the Lender (i) one hundred (100) shares of Series D
Preferred Stock (the “Initial Guaranty Shares”) on the date the Lender is
required to make the Pledge (the “Guaranty Share Issuance Date”) and (ii) on
each anniversary of the Guaranty Share Issuance Date (or portion thereof) in
which the Pledge remains outstanding, a number of shares of Series D Preferred
Stock equal to the product of (A) (x) the average daily balance of the Pledge
during such yearly period (or portion thereof) (provided, however, in no event
shall such amount exceed $10,000,000)

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divided by (y) $10,000,000 multiplied by (B) 200 (the “Annual Guaranty Shares”
and together with the Initial Guaranty Shares, the “Guaranty Shares”). The
number of Annual Guaranty Shares issuable for any partial year period shall be
reduced on a pro-rata basis based on the number of days that the Pledge was
outstanding during such period. The Borrower shall issue the Annual Guaranty
Shares to the Lender on each anniversary date of the Initial Closing Date while
the Pledge is outstanding and, with respect to any partial year period, upon the
termination of the Pledge, within ten (10) Business Days of the termination of
the Pledge. The Lender agrees to pledge such collateral as security for his
obligations under the Personal Guaranty under the terms agreed to by the Senior
Lender and the Lender and set forth in the Pledge Agreement by the Lender in
favor of the Senior Lender.
          (b) Without limiting any other provision contained in this Agreement,
in the event the Borrower defaults on any of its obligations to the Senior
Lender and, as a result, the Lender has liability to the Senior Lender as a
result of the Personal Guaranty, any amounts that the Lender is required to
remit to the Senior Lender on behalf of the Borrower under the Personal Guaranty
shall become Obligations that are immediately due and payable to the Lender,
together with all costs and expenses, including reasonable attorneys’ fees,
arising from negotiations with and payment to the Senior Lender and collections
from the Borrower, and all such Obligations shall accrue interest at the Default
Rate (as defined in the Notes) from the date the Lender remits payment to the
Senior Lender until repaid by the Borrower to the Lender in full.
     2.3 Authorization, Issuance and Purchase of the Warrants.
          (a) In connection with the issuance of the Initial Note, the Borrower
has duly authorized the issuance and sale on the Initial Closing Date to the
Lender of detachable common stock purchase warrants substantially in the form
attached hereto as Exhibit B-1 evidencing the Lender’s right to acquire shares
of Common Stock (the “Initial Warrant”). The Initial Warrant shall provide the
Lender with the right to acquire shares of Common Stock equal to 10% of the
value of the Initial Note based on the Market Price as of the Initial Closing
Date, have an exercise price equal to such Market Price and a term of seven
(7) years; provided, however, that if the Borrower fails to obtain the
Shareholder Approval on or before the Shareholder Meeting Date Deadline, the
warrant coverage on the Initial Warrant shall be adjusted automatically to 50%
of the value of the Initial Note based on the foregoing Market Price and the
exercise price shall be adjusted automatically to 50% of the foregoing Market
Price.
          (b) In connection with the issuance of each Note following the
issuance of the Initial Note, the Borrower has duly authorized the issuance and
sale to the Lender on each Closing Date of detachable common stock purchase
warrants substantially in the form attached hereto as Exhibit B-2 (each, an
“Additional Warrant” and together with the Initial Warrant, the “Warrants”)
evidencing the Lender’s right to acquire the number of shares of Common Stock
equal to 10% of the value of the applicable Note based on the Market Price as of
the applicable Closing Date, have an exercise price equal to such Market Price
and a term of seven (7) years.
          (c) In connection with the Additional Personal Guaranty, the Borrower
has duly authorized the issuance and sale to the Lender, on the Guaranty Share
Issuance Date, of a detachable common stock purchase warrant substantially in
the form attached hereto as Exhibit B-3 (the “Guaranty Warrant”) evidencing the
Lender’s right to acquire the number of

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shares of Common Stock equal to $500,000 divided by the Market Price as of the
Guaranty Share Issuance Date, with an exercise price equal to such Market Price
and a term of seven (7) years.
     2.4 Sale and Purchase. Subject to the terms and conditions and in reliance
upon the representations, warranties and agreements set forth herein, (i) on
each Closing Date, the Borrower shall sell to the Lender, and the Lender shall
purchase from the Borrower, the Notes and Warrants at the purchase price equal
to 100% of the principal amount of the applicable Note; and (ii) on the Guaranty
Share Issuance Date, the Borrower shall issue to the Lender the initial Guaranty
Shares and the Guaranty Warrant.
     2.5 Issue Price. The Borrower and the Lender agree for U.S. federal income
tax purposes (a) that the present value as of the Closing Date of all payments
under the Notes and Warrants shall be such value; and (b) that (x) the aggregate
“issue price” under §1273(b) of the Code of the Notes to be issued hereunder,
and (y) that the aggregate purchase price under §1273(b) of the Code of all of
the Warrants to be issued hereunder, shall be such value and purchase prices,
respectively, as determined by the Borrower.
     2.6 The Closing. Delivery of and payment for the Initial Securities (the
“Initial Closing”) shall be made at the offices of Royer & Associates, LLC, 681
Moore Road, Suite 321, King of Prussia, Pennsylvania, commencing at 10:00 a.m.,
local time, on any Business Day that is at least five (5) Business Days prior to
the Shareholder Meeting Date Deadline and upon at least five (5) Business Days
prior written notice to the Lender, or at such place or on such other date as
may be mutually agreeable to the Borrower and the Lender. The date and time of
the Initial Closing as finally determined pursuant to this Section 2.6 shall be
referred to herein as the “Initial Closing Date.” On each Closing Date following
the Initial Closing Date, delivery of and payment for the Securities at each
Closing shall be made at a place and time as mutually agreed upon by the
Borrower and the Lender.
     2.7 2009 Bridge Note. On February 20, 2009, the Lender deposited $2,000,000
in a restricted bank account of the Borrower that the Borrower established with
PNC Bank in exchange for that certain Secured Promissory Note executed by the
Borrower in favor of the Lender in the amount of $2,000,000, a Common Stock
Warrant, as amended by Amendment No. 1 thereto dated the date hereof, to
purchase 143,885 shares of the Common Stock of the Company and a Security
Agreement (collectively, the “2009 Bridge Loan Documents”). The 2009 Bridge Loan
Documents are attached hereto as Exhibit M, and the 2009 Bridge Note is intended
to be part of the Transactions contemplated hereby.
ARTICLE III
REPAYMENT OF THE NOTES; EXCHANGE OF EXISTING SECURITIES
     3.1 Interest.
          (a) Interest Rates and Interest Payments. Interest on the Notes shall
accrue on the outstanding principal amount at the applicable interest rate and
compound annually. Interest on the Notes will be computed on the basis of a year
of 365 days, for the number of actual days elapsed during which principal is
outstanding.

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          (b) Deferral of Interest Payments. During the term of the Notes,
interest shall accrue and such interest shall not be due currently but shall be
added to the outstanding principal balance of the Notes and become due and
payable on the applicable Maturity Date.
     3.2 Repayment of the Initial Note. The Borrower covenants and agrees to
repay to the Lender no later than the date that is five (5) Business Days after
the Shareholder Meeting Date Deadline, the unpaid principal balance of, together
with all accrued and unpaid interest, fees and other amounts due on, the Initial
Note; provided, however, that if the Shareholder Approval is received, such date
shall be extended automatically until the date that is three (3) years after the
date of issuance of the Initial Note (such date, the “Initial Note Maturity
Date”), subject to any prior repayment obligations as set forth herein.
     3.3 Repayment of the Additional Notes. The Borrower covenants and agrees to
repay to the Lender the unpaid principal balance of, together with all accrued
and unpaid interest, fees and other amounts due on, each Additional Note no
later than the date that is the earlier of three (3) years after the date of
issuance of each Additional Note and December 31, 2012 (each such date, an
“Additional Note Maturity Date” and together with the Initial Note Maturity
Date, sometimes referred to herein as the “Maturity Date”).
     3.4 Maturity; Surrender, etc. Upon payment of the amounts due and owing
under each Note, each such Note shall be surrendered to the Borrower and
canceled and shall not be reissued.
     3.5 Exchange of Existing Securities. In the event: (i) the Borrower obtains
the Shareholder Approval; (ii) there shall have been no Material Adverse Change
and (iii) that all representations and warranties contained in this Agreement
shall remain true and correct in all material respects (except for such
representations and warranties that relate to a specific date, which such
representations and warranties shall be true and correct in all material
respects as of such date, and except for such representations and warranties
that are qualified by materiality and/or knowledge, which such representations
and warranties shall be true and correct in all respects), the outstanding
principal amount of the 2003 Note and all accrued and unpaid interest thereon of
the Borrower owed to the Lender and all 6,000 shares of Series B Preferred Stock
and 3,300 shares of Series C Preferred Stock held by the Lender, representing
all of the issued and outstanding shares of Series B Preferred Stock and
Series C Preferred Stock, together with accrued and unpaid dividends thereon
shall be converted into and exchanged for such number of shares of Series E
Preferred Stock as determined by dividing (a) (i) the aggregate principal and
accrued and unpaid interest under the 2003 Note plus (ii) the stated value per
share of the Series B Preferred Stock multiplied by the number of shares of
Series B Preferred Stock outstanding plus (iii) the stated value per share of
the Series C Preferred Stock multiplied by the number of shares of Series C
Preferred Stock outstanding plus (iv) the aggregate amount of the accrued and
unpaid dividends on the Series B Preferred Stock plus (v) the aggregate amount
of the accrued and unpaid dividends on the Series C Preferred Stock by (b)
$1,000 per share of Series E Preferred Stock. The Series E Preferred Stock shall
have the same rights, preferences and terms and conditions as the Series D
Preferred Stock, except that the conversion price of the Series E Preferred
Stock into Common Stock initially shall be $2.00 per share, subject to
adjustment as set forth in the Statement With Respect to Shares of the Series E
Preferred Stock substantially in

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the form attached hereto as Exhibit C. Such conversion shall occur as of the
date on which the Shareholder Approval is obtained.
ARTICLE IV
CONDITIONS
     4.1 Conditions to the Purchase of the Securities. The obligation of the
Lender to purchase the Securities is subject to the satisfaction, prior to or at
each Closing, of the following conditions:
          (a) Due Diligence. With respect to the Initial Closing, the Lender
shall have completed his due diligence of the Borrower to his satisfaction, in
his sole discretion.
          (b) Representations and Warranties True. The representations and
warranties contained in Article 5 hereof shall be true and correct in all
material respects at and as of the respective Closing Date as though then made.
          (c) Material Adverse Change. With respect to the Initial Closing,
there shall have been no Material Adverse Change since February 29, 2008. With
respect to each Closing following the Initial Closing, there shall have been no
Material Adverse Change since the prior Closing.
          (d) Board Approval. The Borrower shall have received approval of the
Board of Directors of the Borrower to the Transactions.
          (e) Certain Agreements.
          (i) Security Agreement. The Borrower, the Guarantor and the Lender
shall have entered into a security agreement, in form and substance as set forth
in Exhibit E attached hereto (as the same may be amended, modified, supplemented
or restated from time to time in accordance with the terms thereof, the
“Security Agreement”). The Borrower shall have authorized the Lender to file, or
shall have delivered to the Lender, such financing statements and other
instruments (collectively, “Financing Statements”) as the Lender shall require
in order to perfect and maintain the continued perfection of the security
interest created by the Security Agreement. The Lender shall have received
reports of filings with appropriate government agencies showing that there are
no Liens on the assets of the Borrower other than Permitted Liens.
          (ii) Registration Rights Agreement. The Borrower shall have executed
and delivered to the Lender the Amended and Restated Registration Rights
Agreement, substantially in the form of Exhibit F (the “Registration Rights
Agreement”).
          (iii) Guaranty Agreement. The Guarantor shall have executed and
delivered to the Lender the Guaranty Agreement, substantially in the form of
Exhibit G, unconditionally and irrevocably guaranteeing to the Lender the full
and prompt payment and performance of the Borrower’s obligations under the Note.

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          (iv) Mortgage. The Borrower shall have executed and delivered to the
Lender the Mortgage.
          (v) Shareholders Voting Agreement. William F. Mitchell, Sr. shall have
executed and delivered a shareholders voting agreement, substantially in the
form of Exhibit I (the “Shareholders Voting Agreement”).
          (vi) Series D Preferred Stock. The Series D Preferred Stock Statement
With Respect to Shares in substantially the form of Exhibit D hereto shall have
been filed with the Department of State of the Commonwealth of Pennsylvania.
          (f) Specific Conditions for the Purchases of Additional Notes. With
respect to the purchase of Securities following the Initial Closing:
          (i) Shareholder Approval. The Borrower shall have received the
Shareholder Approval.
          (ii) Major Contracts. The Borrower shall have been awarded a Major
Contract and such Major Contract shall be in full force and effect.
          (iii) Financial Conditions. The Lender shall have determined at the
time of each subsequent Closing, in his sole discretion, that the Borrower’s
prospects in the long range for reaching consistent cash flow positive
operations are continuing to improve.
          (iv) Employees. The Borrower shall have entered into amendments to the
employment agreements with the employees set forth on Schedule 4.1(f)(iv) hereto
in form and substance reasonably satisfactory to the Lender.
          (v) Series E Preferred Stock. The Series E Preferred Stock Statement
With Respect to Shares in substantially the form of Exhibit C hereto shall have
been filed with the Department of State of the Commonwealth of Pennsylvania.
          (g) Closing Documents. At each Closing, the Borrower will have
delivered or caused to be delivered to the Lender all of the following documents
in form and substance satisfactory to Lender:
          (i) the applicable Note, duly completed and executed by the Borrower;
          (ii) the applicable Warrant evidencing the right to acquire the number
of shares of Common Stock set forth in Section 2.3;
          (iii) certificates of good standing dated not more than ten
(10) Business Days prior to the applicable Closing Date for the Borrower and the
Guarantor certified by its jurisdiction of organization;

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          (iv) with respect to the Initial Closing, a copy of the Charter
Documents of the Borrower and the Guarantor, certified by the appropriate
governmental official of the jurisdiction of its incorporation as of a date not
more than ten (10) Business Days prior to the Initial Closing Date;
          (v) with respect to the Initial Closing, a copy of the Bylaws of the
Borrower and the Guarantor, certified as of the Initial Closing Date by the
secretary or assistant secretary of the Borrower and the Guarantor;
          (vi) a certificate of the secretary or assistant secretary of the
Borrower and the Guarantor, certifying as to the names and true signatures of
the Executive Officers of the Borrower and the Guarantor authorized to sign this
Agreement and the other Transaction Documents to which it is a party;
          (vii) copies of the resolutions duly adopted by the Borrower’s and the
Guarantor’s board of directors, authorizing the execution, delivery and
performance by the Borrower and the Guarantor of this Agreement and each of the
other Transaction Documents to which it is a party, such other instruments and
documents contemplated hereby to which the Borrower or the Guarantor is a party,
and the consummation of all of the other Transactions, certified as of the
applicable Closing Date by an Executive Officer of the Borrower or the
Guarantor, as the case may be;
          (viii) a certificate dated as of the applicable Closing Date from an
Executive Officer of the Borrower stating that the conditions specified in this
Section 4.1 have been fully satisfied by the Borrower or waived by the Lender,
substantially in the form set forth in Exhibit L;
          (ix) certificates of insurance evidencing the existence of all
insurance required to be maintained by the Borrower pursuant to Section 7.1(c),
together with loss payable endorsements, all satisfactory in the type and extent
of such coverage to the Lender; and
          (x) such other documents relating to the Transactions contemplated by
this Agreement as the Lender may reasonably request.
          (h) Consents, Agreements. The Borrower shall have obtained all
consents and waivers, under any term of any agreement or instrument to which it
is a party or by which it or any of its properties is bound, or any term of any
applicable Law of any Governmental Authority, or any term of any applicable
order, judgment or decree of any court, arbitrator or governmental authority,
necessary or appropriate in connection with the transactions contemplated by
this Agreement, and such consents and waivers shall be in full force and effect
on the applicable Closing Date.
          (i) Compliance with Securities Laws. The offering and sale of the
Notes and Warrants to the Lender shall have complied with all applicable
requirements of federal and state securities laws.

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          (j) No Adverse U.S. Legislation, Action or Decision, etc. No
legislation shall have been enacted by Congress, no other formal action shall
have been taken by any Governmental Authority, whether by order, regulation,
rule, ruling or otherwise, and no decision shall have been rendered by any court
of competent jurisdiction, which would materially and adversely affect the Notes
or the Warrants being purchased by the Lender hereunder.
          (k) No Actions Pending. There shall be no suit, action, investigation,
inquiry or other proceeding by any Governmental Authority or any other Person or
any other legal or administrative proceeding pending or, to the Borrower’s
knowledge, threatened which questions the validity or legality of the
Transactions or injunctive or other equitable relief in connection therewith.
          (l) Fairness Opinion. With respect to the Initial Closing, the
Borrower shall have received a fairness opinion in a form acceptable to the
Lender that the transaction is fair with respect to the shareholders of the
Borrower.
     4.2 Waiver. Any condition specified in Section 4.1 hereof may be waived by
the Lender on or prior to the applicable Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
     5.1 Representations and Warranties of the Borrower. As a material
inducement to the Lender to enter into this Agreement and purchase the Notes and
the Warrants, the Borrower hereby represents and warrants to the Lender as
follows:
          (a) Organization, Qualification and Power. Each of the Borrower and
the Guarantor is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Each of the
Borrower and the Guarantor is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted by it makes such qualification necessary and where the
failure so to qualify would have a Material Adverse Effect. Each of the Borrower
and the Guarantor has all requisite corporate or other organizational power and
authority and all material licenses, permits, approvals and authorizations
necessary to own and operate their properties, to carry on their businesses as
now conducted and presently proposed to be conducted and to enter into each
Transaction Document to which it is a party, to carry out the terms of each such
Transaction Document, and, in the case of the Borrower, to issue and sell the
Notes and the Warrants.
          (b) Power; Authorization; Enforceable Obligations. This Agreement, the
Notes, the Warrants and the other Transaction Documents have been duly
authorized by all necessary corporate action on the part of the Borrower and the
Guarantor, as applicable, except for shareholder approval of the transactions
contemplated by this Agreement as required under Section 713 of the Listing
Standards, Policies and Requirements of AMEX. This Agreement, the Notes, the
Warrants and the other Transaction Documents have been duly executed and
delivered by the Borrower and the Guarantor, as applicable, and constitute
legal, valid and binding obligations of the Borrower, and the Guarantor, as
applicable, enforceable against it in accordance with their respective terms,
except (i) that such enforceability may be limited by

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applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and transfer and similar laws of general application relating to or
affecting the rights and remedies of creditors, and (ii) that acceleration of
the Notes may affect the collectability of that portion of the stated principal
amount thereof which might be determined to constitute unearned interest
thereon.
          (c) No Other Indebtedness. Neither the Borrower nor the Guarantor has
any outstanding Indebtedness to any person or entity other than the Senior Debt,
the Indebtedness contemplated by this Agreement and the Indebtedness set forth
on Schedule 5.1(c) hereto (“Permitted Indebtedness”).
          (d) Business. The Borrower and the Guarantor are primarily engaged in
the business of designing, manufacturing and selling software-driven products
and services used to (i) create and monitor the physiological effects of motion
on humans and equipment; (ii) control, modify, simulate and measure
environmental conditions; and (iii) other activities incidental to the business
(the “Business”).
          (e) Financial Statements. The Borrower has delivered to the Lender
complete and correct copies of (i) its annual report on Form 10-K for the fiscal
year ended February 29, 2008 as filed with the SEC (the “Form 10-K”), and
(ii) its quarterly report on Form 10-Q for the Fiscal Quarters ended May 30,
2008, August 29, 2008 and November 28, 2008 each as filed with the SEC
(collectively, the “Form 10-Q”). The Form 10-K correctly describes, in all
material respects, as of their respective dates, the business then conducted and
proposed to be conducted by the Borrower. There are included in the Form 10-K
financial statements of the Borrower for the fiscal year ended February 29,
2008, accompanied by the opinion thereon of Friedman LLP, independent registered
public accounting firm, and in the Form 10-Q financial statements of the
Borrower for the Fiscal Quarters ended May 30, 2008, August 29, 2008 and
November 28, 2008. All financial statements included in the foregoing materials
delivered to the Lender (except as otherwise specified therein) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods specified and present fairly the financial position of the Borrower and
its Subsidiaries as of the respective dates specified and the results of their
operations and cash flows for the respective periods specified.
          (f) Capitalization and Related Matters. As of the Initial Closing
Date, the authorized capital stock of the Borrower will consist of 20,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock, par value $0.05
per share, of which 15,000 has been designated Series B Preferred Stock, 3,300
has been designated Series C Preferred Stock, 11,000 has been designated
Series D Preferred Stock and 25,000 has been designated Series E Preferred
Stock. On the Initial Closing Date, 9,049,351 shares of the Common Stock are
issued and outstanding, 6,000 shares of Series B Preferred Stock are issued and
outstanding, 3,300 shares of Series C Preferred Stock are issued and outstanding
and no shares of Series D Preferred Stock and no shares of Series E Preferred
Stock are issued and outstanding. The shares of Series E Preferred Stock
issuable upon conversion of the 2003 Note, the Series B Preferred Stock and
Series C Preferred Stock in accordance with Section 3.5 above, the Series D
Preferred Stock issuable as the original fee, as interest payments under the
Notes and in connection with the Additional Personal Guaranty and the shares of
Common Stock issuable upon conversion of such Series E Preferred Stock and
Series D Preferred Stock and the exercise of the Warrants shall be

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duly authorized and validly reserved for issuance upon such conversion and
exercise and, when so issued in accordance with their terms, will be validly
issued, fully paid and non-assessable. Except as set forth on Schedule 5.1(f),
as of the applicable Closing Date, the Borrower will not have outstanding
securities convertible into or exchangeable for any shares of its capital stock,
nor will it have outstanding any rights to subscribe for or to purchase, or any
options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to, any shares of its capital stock or any securities
convertible into or exchangeable for any shares of its capital stock.
          (g) No Breach. Except as specifically provided by the Transaction
Documents, the execution and delivery by the Borrower and the Guarantor of the
Transaction Documents, as applicable, and the consummation of the Transactions
do not and will not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) except as
created pursuant to the Security Documents, result in the creation of any Lien
upon the Borrower’s or the Guarantor’s capital stock or assets pursuant to,
(iv) give any third party the right to accelerate any obligation under,
(v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice to any Governmental Authority
pursuant to, the Charter Documents or the Bylaws of the Borrower or the
Guarantor, or any Law to which the Borrower or the Guarantor is subject, or any
agreement, statute, rule or regulation, instrument, order, judgment or decree to
which the Borrower or the Guarantor is a party or to which they or their assets
are subject.
          (h) Governmental Approvals. Except as specifically provided by the
Transaction Documents, no registration with or consent or approval of, or other
action by, any Governmental Authority or any other Person is or will be required
in connection with the consummation of the Transactions by the Borrower or the
Guarantor and the performance of their obligations thereunder.
          (i) No Material Adverse Change and no Material Adverse Effect. Since
February 29, 2008, there has been no event or occurrence that would constitute a
Material Adverse Change or that is likely to have a Material Adverse Effect,
except as set forth in the Form 10-K or the Form 10-Qs or in any Form 8-K filed
by the Borrower.
          (j) Litigation. Except as set forth on Schedule 5.1(j) hereto, there
are no actions, suits or proceedings at law or in equity or by or before any
arbitrator or any Governmental Authority now pending or, to the knowledge of the
Borrower’s management after due inquiry, threatened against or filed by or
affecting the Borrower or the Guarantor or their directors or officers or the
businesses, assets or rights of the Borrower or the Guarantor.
          (k) Compliance with Laws. Neither the Borrower nor the Guarantor is in
violation of any applicable Law, the effect of which violation could have a
Material Adverse Effect. Neither the Borrower nor the Guarantor is in default
with respect to any judgment, order, writ, injunction, decree, rule or
regulation of any Governmental Authority. Neither the Borrower nor the Guarantor
is in, and the consummation of the Transactions will not cause any, default
concerning any judgment, order, writ, injunction or decree of any Governmental
Authority, and there is no investigation, enforcement action or regulatory
action pending or threatened against or affecting the Borrower or the Guarantor
by any Governmental Authority, except as set forth

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on Schedule 5.1(k). Except as set forth on Schedule 5.1(k), there is no remedial
or other corrective action that the Borrower or the Guarantor is required to
take to remain in compliance with any judgment, order, writ, injunction or
decree of any Governmental Authority or to maintain any material permits,
approvals or licenses granted by any Governmental Authority in full force and
effect.
          (l) Environmental Protection. Except as set forth on Schedule 5.1(l)
and after giving effect to the Transactions: (i) the Business of the Borrower
and the Guarantor, the methods and means employed by the Borrower and the
Guarantor in the operation thereof (including all operations and conditions at
or in the properties of the Borrower and the Guarantor), and the assets owned,
leased, managed, used, controlled, held or operated by the Borrower and the
Guarantor, comply in all material respects with all applicable Environmental
Laws; (ii) with respect to the Properties and Facilities, and except as
disclosed on Schedule 5.1(l), the Borrower and the Guarantor have obtained,
possess, and are in full compliance with all permits, licenses, reviews,
certifications, approvals, registrations, consents, and any other authorizations
required for material compliance with any Environmental Laws; (iii) neither the
Borrower nor the Guarantor has received (x) any claim or notice of violation,
lien, complaint, suit, order or other claim or notice to the effect that the
Borrower or the Guarantor is or may be liable to any Person as a result of
(A) the environmental condition of any of its Properties and Facilities or any
other property, or (B) the release or threatened release of any Pollutant, or
(y) any letter or request for information under Section 104 of the CERCLA, or
comparable Laws, and to the best of the Borrower’s knowledge, none of the
operations of the Borrower and the Guarantor are the subject of any
investigation by a Governmental Authority evaluating whether any remedial action
is needed to respond to a release or threatened release of any Pollutant at the
Properties and Facilities or at any other location, including any location to
which the Borrower or the Guarantor has transported, or arranged for the
transportation of, any Pollutants; (iv) except as disclosed on Schedule 5.1(l),
neither the Borrower or any Guarantor nor any prior owner or operator has
incurred in the past, or is now subject to, any material Environmental
Liabilities; (v) except as disclosed on Schedule 5.1(l), there are no Liens,
covenants, deed restrictions, notice or registration requirements, or other
limitations applicable to the Properties and Facilities, based upon any
Environmental Laws; (vi) there are no USTs located in, at, on or under the
Properties and Facilities other than the USTs identified on Schedule 5.1(l) as
USTs; and each of those USTs is in material compliance with all Environmental
Laws and other legal obligations; and (vii) except as disclosed on
Schedule 5.1(l), to the Borrower’s knowledge, there are no PCBs, lead paint,
asbestos (of any type or form), or materials, articles or products containing
PCBs, lead paint or asbestos, located in, at, on, under, a part of, or otherwise
related to the Properties and Facilities (including, without limitation, any
building, structure or other improvement that is a part of the Properties and
Facilities), and all of the PCBs, lead paint, asbestos, and materials, articles
and products containing PCBs, lead paint or asbestos identified in the
Environmental Schedule are in full compliance with all Environmental Laws and
other legal obligations. To the knowledge of the Borrower, the Borrower is not
subject to liability under any Environmental Laws that would result in a
Material Adverse Effect.
          (m) Use of Proceeds; Legal Investments. The Borrower will apply any
proceeds of the sale of the Notes and Warrants, simultaneously with the Closing,
(a) in accordance with the terms of Article 2 above and (b) to the payment of
fees and expenses

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incurred in connection with the offering and sale of the Notes and Warrants, the
refinancing of the Senior Debt and the obtaining of the Shareholder Approval.
          (n) Taxes. Each of the Borrower and the Guarantor has filed or caused
to be filed all tax returns which are required to be filed and have paid all
taxes shown to be due and payable on said returns or on any assessments made
against it or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any Governmental Authority (other than
any amount or validity of which are currently being contested in good faith by
appropriate proceedings and with respect to which reserves, if any, in
conformity with GAAP have been provided on the books of the Borrower); no tax
Lien has been filed against the Borrower or the Guarantor, and, to the knowledge
of the Borrower, no claim is being asserted, with respect to any such tax, fee
or other charges.
          (o) ERISA; Labor and Employment.
          (i) The Borrower is and each of its Plans is in compliance in all
material respects with those provisions of ERISA, the Code, the Age
Discrimination in Employment Act, and the regulations and published
interpretations thereunder which are applicable to the Borrower or any such
Plan. As of the date hereof, no Reportable Event has occurred with respect to
any Plan as to which the Borrower is or was required to file a report with the
PBGC. No Plan has any material amount of unfunded benefit liabilities (within
the meaning of Section 4001(a)(18) of ERISA) or any accumulated funding
deficiency (within the meaning of Section 302(a)(2) of ERISA), whether or not
waived, and the Borrower has not incurred nor reasonably expects to incur any
material withdrawal liability under Subtitle E of Title IV of ERISA to a
Multiemployer Plan. The Borrower is in compliance in all material respects with
all labor and employment laws, rules, regulations and requirements of all
applicable domestic and foreign jurisdictions. There are no pending or
threatened labor disputes, work stoppages or strikes.
          (ii) The Borrower is not a party to any collective bargaining
agreement, and there are no strikes, work stoppages, material grievances,
disputes or controversies with any union or any other organization of the
Borrower’s employees, or threats of strikes, work stoppages or any asserted
pending demands for collective bargaining by any union or organization, except
to the extent that such strikes, work stoppages, material grievances, disputes
or controversies could not reasonably be expected to have a Material Adverse
Effect. The Borrower has not, within the two-year period preceding the Initial
Closing Date, taken any action which would have constituted or resulted in a
“plant closing” or “mass layoff” within the meaning of the Federal Worker
Adjustment and Retraining Notification Act of 1988 or any similar Law. The
procedures by which the Borrower has hired or will hire its employees comply and
will comply in all material respects with each collective bargaining agreement
to which the Borrower is a party and any applicable Law. The Borrower is in
compliance with the Fair Labor Standards Act, as amended, and has paid all
minimum and overtime wages required by law to be paid to its respective
employees, except for violations which could not have a Material Adverse Effect.

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          (p) Investment Company Act; Public Utility Holding Company Act. The
Borrower is not (i) an “investment company” or “controlled” by an investment
company within the meaning of the Investment Company Act of 1940, as amended, or
(ii) a “holding company” or a “subsidiary company” of a “holding company” or an
“affiliate” of a “holding company” or of a “subsidiary company” of a “holding
company,” within the meaning of the Public Utility Holding Company Act of 1935,
as amended.
          (q) Condition of and Title to Properties. The real property owned or
leased by the Borrower and the Guarantor in the United States as of the Initial
Closing Date is described on Schedule 5.1(q) hereto. Each of the Borrower and
the Guarantor has good title to or valid leasehold interest in all properties,
assets and other rights which it purports to own or lease or which are reflected
as owned or leased on its books and records (the “Properties and Facilities”),
free and clear of all Liens and encumbrances except Permitted Liens, and subject
to the terms and conditions of the applicable leases. Except as described on
Schedule 5.1(q), all leases of property are in full force and effect. No consent
under any lease is required in connection with the consummation of the
transactions contemplated hereby. Except for financing statements evidencing
Permitted Liens, no effective financing statement under the Uniform Commercial
Code is in effect in any jurisdiction and no other filing which names the
Borrower or the Guarantor as debtor or which covers or purports to cover any of
the assets of the Borrower or the Guarantor is currently effective and on file
in any state or other jurisdiction, and neither the Borrower nor the Guarantor
has signed any such financing statement or filing or any security agreement
authorizing any secured party thereunder to file any such financing statement or
filing. All of the assets and properties of the Borrower and the Guarantor that
are necessary for the operation of their respective businesses are in good
working condition and are able to serve the functions for which they are
currently being used, except for ordinary wear and tear.
          (r) Proprietary Rights. Each of the Borrower and the Guarantor owns,
or is licensed to use its Proprietary Rights necessary for the conduct of its
business as currently conducted. Except as set forth on Schedule 5.1(r), no
claim has been asserted and is pending by any Person challenging or questioning
the use of any such Proprietary Rights, nor does the Borrower know of any valid
basis for any such claim. The use of such Proprietary Rights by the Borrower and
the Guarantor does not infringe the rights of any Person, except for such claims
and infringements that, in the aggregate, do not have a Material Adverse Effect.
To the best knowledge of the Borrower, except as set forth on Schedule 5.1(r),
no slogan or other advertising, device, product, process, method, substance,
part or component or other material now employed, or now contemplated to be
employed, by any of the Borrower and the Guarantor infringes upon or conflicts
with any rights owned by any other Person, and no claim or litigation regarding
any of the foregoing is pending or, to the knowledge of the Borrower,
threatened. No patent, invention, device, application, and no statute, law,
rule, regulation, standard or code involving the Borrower’s or the Guarantor’s
Proprietary Rights is pending or, to the knowledge of the Borrower, proposed,
except where the consequences in the aggregate could not reasonably be expected
to have a Material Adverse Effect.
          (s) [Intentionally omitted]

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          (t) Subsidiaries. As of the Closing Date, the Borrower has no
Subsidiaries except for those set forth on Schedule 5.1(t), each of which was
duly formed and is existing under the law of the jurisdiction set forth opposite
their names. All of the issued and outstanding shares of capital stock of the
Subsidiaries are duly and validly authorized and issued and fully paid and
nonassessable and are owned by the Borrower (except for directors’ qualifying
shares). There are no options, warrants or other rights outstanding to purchase
any capital stock of any of the Subsidiaries, nor are any securities of any of
the Subsidiaries convertible into or exchangeable for capital stock of the
Subsidiaries except as described on Schedule 5.1(t).
          (u) Broker’s or Finder’s Commissions. No broker’s or finder’s or
placement fee or commission will be payable to any broker or agent engaged by
the Borrower or any of its officers, directors or agents with respect to the
issuance and sale of the Notes, the Warrants or the Transactions. The Borrower
agrees to indemnify the Lender and hold the Lender harmless from and against any
claim, demand or liability for broker’s or finder’s or placement fees or similar
commissions, alleged to have been incurred in connection with such transactions,
other than any broker’s or finder’s fees payable to Persons engaged by the
Lender.
          (v) Absence of Undisclosed Liabilities. Except as set forth on
Schedule 5.1(v), the Borrower has no liabilities or obligations, either accrued,
absolute, contingent or otherwise, except:
          (i) those liabilities or obligations set forth on the Financial
Statements and not heretofore paid or discharged;
          (ii) liabilities arising in the ordinary course of business under any
agreement, contract, commitment, lease or plan specifically disclosed on the
schedules or not required to be disclosed because of the term or amount involved
or otherwise; and
          (iii) those liabilities or obligations incurred, consistently with
past business practice, in or as a result of the normal and ordinary course of
business.
          (w) Federal Regulations. No part of the proceeds of the Credit
Facility will be used for “purchasing” or “carrying” any “margin stock” within
the respective meanings of each of the quoted terms under Regulation U or for
any purpose which violates the provisions of Regulation U or any other
Regulations of the Board of Governors of the Federal Reserve System. If
requested by the Lender, the Borrower will furnish to the Lender a statement to
the foregoing effect in conformity with the requirements of FR Form U-l referred
to in said Regulation U. No part of the proceeds of the Credit Facility
hereunder will be used for any purpose which violates, or which is inconsistent
with, the provisions of either of Regulations T and X.
          (x) Complete Disclosure. All statements and material furnished by or
on behalf of the Borrower to the Lender for purposes of or in connection with
this Agreement or the Transactions is, and all other statements and material
hereafter furnished by or on behalf of the Borrower will be, true and accurate
in all material respects on the date as of which such information is furnished
and not incomplete or misleading by omitting to state any fact necessary to make
such information not misleading at such time in light of the circumstances under
which such information was provided.

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          (y) Security Interests. At all times after execution and delivery of
the Security Documents by the party or parties thereto and completion of the
filings and recordings listed on Schedule 5.1(y), the security interests created
for the benefit of the Lender pursuant to the Security Documents will constitute
valid, perfected security interests in the collateral subject thereto, subject
to no other Liens whatsoever, except Permitted Liens.
          (z) Insurance. The Borrower currently maintains insurance which meets
or exceeds the requirements of Section 7.1(c) and the applicable insurance
requirements set forth in the other Transaction Documents. Schedule 5.1(z)
hereto lists, as of the Initial Closing Date, all insurance policies and other
bonds to which the Borrower is a party, all of which are valid and in full force
and effect. No written notice has been given or claim made and the Borrower has
no knowledge that any grounds exist to cancel or avoid any of such policies or
bonds or to reduce the coverage provided thereby or any replacements thereof.
Such policies and bonds or any replacements thereof provide adequate coverage
from reputable and financially sound insurers in amounts sufficient to insure
the assets and risks of the Borrower in accordance with prudent business
practice in the industry of the Borrower.
          (aa) Authorizations.
          (i) Except as set forth on Schedule 5.1(aa), each of the Borrower and
the Guarantor possesses all material approvals of each Governmental Authority
(the “Governmental Approvals”) necessary for the operations of its business and
is not in material violation thereof. All such Governmental Approvals are in
full force and effect, and no event has occurred that permits, or after notice
or lapse of time could permit, the revocation, termination or material and
adverse modification of any such Governmental Approval.
          (ii) Except as set forth on Schedule 5.1(aa), neither the Borrower nor
the Guarantor has knowledge of any investigation, notice of apparent liability,
violation, forfeiture or other order or complaint issued by or before any
Governmental Authority, or of any other proceedings of or before any
Governmental Authority, which could reasonably be expected to have a Material
Adverse Effect.
          (bb) No Consents. Except as set forth in Schedule 5.1(bb), no consent,
approval or authorization of any Person is required for the valid execution and
delivery of this Agreement or the valid offer, issue, sale and delivery of the
Notes and Warrants pursuant to this Agreement.
          (cc) Shareholders Voting Agreement. Pursuant to the terms of the
Shareholders Voting Agreement, William Mitchell, Sr. has agreed to vote the
shares of Common Stock owned by him in favor of the transactions contemplated by
this Agreement. The Borrower covenants to use its reasonable best efforts to
obtain the agreement of other shareholders of the Borrower owning, or
controlling the voting power of, greater than five percent (5%) of the issued
and outstanding shares of Common Stock to vote the shares of Common Stock owned
by them in favor of the Shareholder Approval.

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          (dd) Foreign Corrupt Practices. Neither the Borrower, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Borrower or any Subsidiary has, in the course of his actions
for, or on behalf of, the Borrower, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
          (ee) No Defaults. Except as set forth on Schedule 5.1(ee), neither the
Borrower nor the Guarantor is in default under or with respect to any of its
Contractual Obligations in any respect which could reasonably be expected to
have a Material Adverse Effect. No Default or Event of Default has occurred and
is continuing.
ARTICLE VI
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE LENDER
     6.1 Authorization; Enforceable Obligations. This Agreement and the other
Transaction Documents to which the Lender is a party have been duly executed and
delivered by the Lender and constitute legal, valid and binding obligations of
the Lender, enforceable against him in accordance with their respective terms,
except that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and transfer and
similar laws of general application relating to or affecting the rights and
remedies of creditors.
     6.2 No Breach. The execution and delivery by the Lender of the Transaction
Documents to which he is a party and the consummation of the Transactions do not
and will not (i) conflict with or result in a breach of the terms, conditions or
provisions of, (ii) constitute a default under, (iii) give any third party the
right to accelerate any obligation under, (iv) result in a violation of, or
(v) require any authorization, consent, approval, exemption or other action by
or notice to any Governmental Authority pursuant to, any Law to which the Lender
is subject, or any agreement, statute, rule or regulation, instrument, order,
judgment or decree to which the Lender is a party or to which he or his assets
are subject.
     6.3 Governmental Approvals. Except as specifically provided by the
Transaction Documents, no registration with or consent or approval of, or other
action by, any Governmental Authority or any other Person is or will be required
in connection with the consummation of the Transactions by the Lender and the
performance of his obligations thereunder.
     6.4 Restricted Securities. The Lender acknowledges that the Securities have
not been registered under the Securities Act and may be resold only if
registered pursuant to the provisions of the Securities Act or if an exemption
from registration is available, and, except as provided in the Registration
Rights Agreement, that the Borrower is not required to register any of the
Securities.
     6.5 Legends; Lender’s Representations. The Lender hereby represents and
warrants to the Borrower that he is an “accredited investor” within the meaning
of Rule 501(a) under the

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Securities Act and is acquiring the Securities for investment for the Lender’s
own account, with no present intention of dividing his participation with others
(except for a potential transfer or transfers of the Securities to an affiliate
or affiliates of the Lender) or reselling or otherwise distributing the same in
violation of the Securities Act or any applicable state securities laws. The
Borrower may place an appropriate legend on the Securities owned by the Lender
concerning the restrictions set forth in this Article 6. Upon the assignment or
transfer by the Lender or any of his successors or assignees of all or any part
of the Securities, the term “Lender” as used herein shall thereafter mean, to
the extent thereof, the then holder or holders of such Securities, or portion
thereof.
     6.6 Reliance on Exemptions. The Lender understands that the Securities are
being offered and sold to him in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Borrower is relying upon the truth and accuracy of, and the Lender’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Lender set forth herein in order to determine the
availability of such exemptions and the eligibility of the Lender to acquire the
Securities.
     6.7 Prohibition on Short Sales. The Lender will not engage in any short
sale of any shares of Common Stock or have in effect a short position with
respect thereto (whether such short sale or position is against the box and
regardless of when such position was entered into).
     6.8 Transfer of Notes. Subject to Section 6.5 hereof, a holder of a Note
may transfer such Note to a new holder, or may exchange such Note for Notes of
different denominations (but in no event of denominations of less than $500,000
or increments of $100,000 in excess thereof in original principal amount), by
surrendering such Note to the Borrower duly endorsed for transfer or accompanied
by a duly executed instrument of transfer naming the new holder (or the current
holder if submitted for exchange only), together with written instructions for
the issuance of one or more new Notes specifying the respective principal
amounts of each new Note and the name of each new holder and each address
therefor. The Borrower shall simultaneously deliver to such holder or its
designee such new Notes, shall mark the surrendered Notes as canceled. The
Borrower shall not be required to recognize any subsequent holder of a Note
unless and until the Borrower has received reasonable assurance that all
applicable transfer taxes have been paid. Notwithstanding the foregoing, a
holder of a Note may not transfer such Note or any of the other Securities to a
competitor of the Borrower or any Subsidiary or Affiliate of the Borrower.
     6.9 Replacement of Lost Securities. Upon receipt of evidence reasonably
satisfactory to the Borrower of the mutilation, destruction, loss or theft of
any Securities and the ownership thereof, the Borrower shall, upon the written
request of the holder of such Securities, execute and deliver in replacement
thereof new Securities in the same form, in the same original principal amount
and dated the same date as the Securities so mutilated, destroyed, lost or
stolen; and such Securities so mutilated, destroyed, lost or stolen shall then
be deemed no longer outstanding hereunder. If the Securities being replaced have
been mutilated, they shall be surrendered to the Borrower; and if such replaced
Securities have been destroyed, lost or stolen, such holder thereof shall
furnish the Borrower with a written indemnity, in form satisfactory to the
Borrower, to save it harmless in respect of such replaced Security.

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ARTICLE VII
COVENANTS
     7.1 Affirmative Covenants. The Borrower covenants that, so long as all or
any of the principal amount of the Notes or any interest thereon shall remain
outstanding, the Borrower shall and cause the Guarantor to:
          (a) Existence. Do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its legal existence.
          (b) Businesses and Properties; Compliance with Laws. At all times
(i) do or cause to be done all things necessary to preserve, renew and keep in
full force and effect the rights, licenses, registrations, permits,
certifications, approvals, consents, franchises, Proprietary Rights which may be
material to the conduct of the Business; (ii) comply in all material respects
with all Laws applicable to the operation of such business, including but not
limited to, all Environmental Laws, whether now in effect or hereafter enacted
and with all other applicable Laws, (iii) take all action which may be required
to obtain, preserve, renew and extend all rights, Proprietary Rights,
franchises, registrations, certifications, approvals, consents, licenses,
permits and any other authorizations which may be material to the operation of
such business, (iv) maintain, preserve and protect all property material to the
conduct of such business, and (v) except for obsolete or worn out equipment,
keep their property in good repair, working order and condition and from time to
time make, or cause to be made, all needful and proper repairs, renewals,
additions, improvements and replacements thereto necessary in order that the
business carried on in connection therewith may be properly conducted at all
times.
          (c) Insurance. Maintain insurance required by the Transaction
Documents and any and all contracts entered into by the Borrower under policies
issued by financially sound and reputable insurers in such amounts as are
customary with companies similarly situated and in the same or similar business.
The Borrower shall pay all insurance premiums payable by it and shall deliver
the policy or policies of such insurance (or certificates of insurance with
copies of such policies) to the Lender. All insurance policies of the Borrower
shall contain endorsements, in form and substance reasonably satisfactory to the
Lender, providing that the insurance shall not be cancelable except upon thirty
(30) days’ prior written notice to the Lender. The Lender shall be shown as a
loss payee and an additional named insured party under all such insurance
policies.
          (d) Obligations and Taxes. Pay and discharge promptly when due all
taxes, assessments and governmental charges or levies imposed upon them or upon
their income or profits or in respect of their properties before the same shall
become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise, which, if unpaid, might give rise to Liens
or charges upon such properties or any part thereof; provided, however, that
neither the Borrower nor the Guarantor shall be required to pay and discharge or
to cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as the validity or amount thereof shall be contested in good faith
by appropriate proceedings and the Borrower or such Guarantor shall have set
aside on their books adequate reserves with respect thereto.

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          (e) Financial Statements; Reports. Furnish to the Lender:
          (i) not later than the ninetieth (90th) day after the end of each
fiscal year of the Borrower, Consolidated balance sheets of the Borrower and its
Subsidiaries as at the end of such year and the related Consolidated statements
of income, shareholders’ equity and cash flows of the Borrower and its
Subsidiaries for such fiscal year, setting forth in each case in comparative
form (x) the Consolidated figures for the previous fiscal year and (y) the
figures set forth in the budget for such period, all in reasonable detail and
accompanied by a report of Friedman LLP or other reputable firm of independent
registered public accounting firm, which report shall state that the
Consolidated financial statements of the Borrower for such period present fairly
the financial position of the Borrower and its Subsidiaries as at the dates
indicated and the results of their operations and their cash flows for the
periods indicated in conformity with GAAP applied on a basis consistent with
prior years (except as otherwise specified in such report) and that the audit by
such accountants in connection with such Consolidated financial statements has
been made in accordance with GAAP; provided that so long as the Borrower is
subject to the reporting provisions of the Securities Exchange Act, timely
delivery of copies of the Borrower’s annual report on Form 10-K for such period
will satisfy the requirements of this paragraph (i) (except for the requirement
included in clause (y) above);
          (ii) not later than the forty-fifth (45th) day after the end of each
of the first three quarterly fiscal periods in each fiscal year of the Borrower,
Consolidated balance sheets of the Borrower and its Subsidiaries as at the end
of such period and the related Consolidated statements of income, shareholders’
equity and cash flows of the Borrower and its Subsidiaries for such period and
(in the case of the second and third quarterly periods) for the period from the
beginning of the current fiscal year to the end of such quarterly period,
setting forth in each case in comparative form (x) the consolidated figures for
the corresponding periods of the previous fiscal year and (y) the figures set
forth in the budget for such period, all in reasonable detail and certified by a
principal financial officer of the Borrower as presenting fairly, in accordance
with GAAP (except for the absence of notes thereto) applied (except as
specifically set forth therein) on a basis consistent with such prior fiscal
periods, the information contained therein, subject to changes resulting from
normal year-end audit adjustments; provided that so long as the Borrower is
subject to the reporting provisions of the Securities Exchange Act, timely
delivery of copies of the Borrower’s quarterly report on Form 10-Q for such
period will satisfy the requirements of this paragraph (ii) (except for the
requirement included in clause (y) above);
          (f) Certificates; Other Information. Furnish to the Lender:
          (i) [Intentionally omitted];
          (ii) concurrently with the delivery of the financial statements
referred to in subsections 7.1(e)(i) and (ii), a compliance certificate, in
substantially the form attached as Exhibit N (the “Compliance Certificate”),
executed by an Executive Officer;

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          (iii) within five (5) days after the same are sent, copies of all
financial statements and reports which the Borrower sends to any of its
shareholders and within five days after the same are filed, copies of all
financial statements and reports which the Borrower may make to, or file with,
the Securities Exchange Commission or any successor or analogous Governmental
Authority;
          (iv) promptly upon their becoming available to the Borrower, any
reports including management letters submitted to the Borrower by independent
accountants in connection with any annual, interim or special audit;
          (g) Litigation and Other Notices. Give the Lender prompt written
notice of the following:
          (i) Orders; Injunctions. The issuance by any Governmental Authority of
any injunction, order, decision or other restraint prohibiting, or having the
effect of prohibiting, the making of any loan or the initiation of any
litigation or similar proceeding seeking any such injunction, order or other
restraint.
          (ii) Litigation. The notice, filing or commencement of any action,
suit or proceeding against the Borrower or the Guarantor whether at law or in
equity or by or before any court or any federal, state, municipal or other
governmental agency or authority and that, if adversely determined against the
Borrower or the Guarantor, could result in uninsured liability in excess of
$150,000 in the aggregate.
          (iii) Environmental Matters. (A) Any release or threatened release of
any Pollutant required to be reported to any Governmental Authority under any
applicable Environmental Laws, (B) any Removal, Remedial or Response action
taken by the Borrower or any other person in response to any Pollutant in, at,
on or under, a part of or about the Borrower’s or either Guarantor’s Properties
and Facilities, or any other property for which the Borrower or either Guarantor
is responsible, (C) any violation by the Borrower or the Guarantor of any
Environmental Law, in each case, that could result in a Material Adverse Effect,
or (D) any notice, claim or other information that the Borrower or the Guarantor
might be subject to an Environmental Liability.
          (iv) Default. Any Default or Event of Default, specifying the nature
and extent thereof and the action (if any) that is proposed to be taken with
respect thereto.
          (v) Material Adverse Effect. Any development in the Business or in the
affairs of the Borrower or the Guarantor that could have a Material Adverse
Effect.
          (h) ERISA. Comply in all material respects with the applicable
provisions of ERISA and the provisions of the Code relating thereto and furnish
to the Lender (i) as soon as possible, and in any event within thirty (30) days
after the Borrower knows thereof, notice of (A) the establishment by the
Borrower of any Plan, (B) the commencement by the Borrower of contributions to a
Multiemployer Plan, (C) any failure by the Borrower or any of its Affiliates to
make contributions required by Section 302 of ERISA (whether or not such
requirement is waived pursuant to Section 303 of ERISA), or (D) the occurrence
of any Reportable Event with respect to any Plan or Multiemployer Plan for which
the reporting requirement is not waived,

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together with a statement of an officer setting forth details as to such
Reportable Event and the action which the Borrower proposes to take with respect
thereto, together with a copy of the notice of such Reportable Event given to
the PBGC if any such notice was provided by the Borrower, and (ii) promptly
after receipt thereof, a copy of any notice the Borrowers may receive from the
PBGC relating to the intention of the PBGC to terminate any Plan or
Multiemployer Plan, or to appoint a trustee to administer any Plan or
Multiemployer Plan, and (iii) promptly after receipt thereof, a copy of any
notice of withdrawal liability from any Multiemployer Plan.
          (i) Maintaining Records; Access to Premises and Inspections. Maintain
financial records in accordance with generally accepted practices and, on no
more than two (2) occasions during any twelve (12) month period, during business
hours and after reasonable notice has been provided, permit an authorized
representative of the Lender to visit and inspect the properties and financial
records of the Borrower and to make extracts from such financial records, all at
the Borrower’s reasonable expense, and permit any authorized representative to
discuss the affairs, finances and conditions of the Borrower with the Borrower’s
Executive Officers, and the Borrower’s independent public accountants.
          (j) Covenants Regarding Formation of Subsidiaries and Acquisitions. At
the time of the formation of any new domestic Subsidiary of the Borrower which
is permitted under this Agreement, (i) provide the Lender an executed joinder
agreement, in form and substance acceptable to the Lender, pursuant to which
such domestic Subsidiary shall become a Guarantor under the Guaranty and a
Security Agreement and appropriate financing statements so that all of the
assets of such domestic Subsidiary shall be pledged to the Lender, (ii) provide
a statement of an Executive Officer that no Default or Event of Default exists
or would be caused by the formation; and (iii) provide all other documentation,
including one or more opinions of counsel, reasonably satisfactory to the
Lender, which in his reasonable opinion is appropriate with respect to the
formation of such domestic Subsidiary. Any document, agreement or instrument
executed or issued pursuant to this subsection 7.1(j) shall be a “Transaction
Document” for purposes of this Agreement.
          (k) Board of Directors. Ensure that the Board of Directors of the
Borrower consists of five (5) members, two (2) of which members shall be the
Lender (or his designee) and the Borrower’s Chief Executive Officer. Prior to
the date on which the Borrower obtains the Shareholder Approval, the Lender
shall have the right to consent to one (1) of the other nominees to the Board of
Directors of the Borrower, such consent to be granted or withheld in the
Lender’s reasonable discretion. After the date on which the Borrower obtains the
Shareholder Approval, the Lender shall have the right to consent to all other
nominees to the Board of Directors of the Borrower, such consent to be granted
or withheld in the Lender’s reasonable discretion; provided, however, that this
right shall not be construed to mean Lender has the right to appoint or nominate
such directors, rather than to consent to their nomination or appointment.
          (l) Proxy Statement and Form 10-K. As soon as practicable but in no
event later than twenty (20) days following the date hereof, file with the SEC
an annual report on Form 10-K for its fiscal year ended February 28, 2009 and a
preliminary proxy statement on Schedule 14A that provides, in addition to any
disclosure generally required in a proxy statement for a registered
corporation’s annual meeting, that the shareholders of the Borrower will vote on
the proposals set forth in the definition of Shareholder Approval in Article I
above. The Borrower

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shall, as soon as practicable but in no event later than five (5) days after
notice from the SEC that the SEC has no comments or no further comments to the
proxy statement, mail a definitive proxy statement on Schedule 14A to its
shareholders of record as of the record date for the Meeting that provides for
the vote by the shareholders on the foregoing shareholder actions. The Lender
agrees to cooperate and timely respond to any questions or other requests made
by the Borrower relating to the Lender that are reasonably necessary to respond
to any such SEC comments.
          (m) Shareholder Approval. As soon as practicable, but in no event
later than the Shareholder Meeting Date Deadline, hold an annual meeting of its
shareholders (the “Meeting”) to obtain the Shareholder Approval. In connection
therewith, the Borrower shall use its best efforts to obtain the Shareholder
Approval at the Meeting.
          (n) Payment of Principal, Interest and Other Amounts Due. Pay when due
all Obligations to the Lender and all other amounts payable by it hereunder and
under the Notes; provided, however, that notwithstanding the respective Maturity
Dates of the Notes, the Borrower covenants to make partial principal payments
under the Notes from time to time after June 30, 2010 upon the Borrower’s
reasonable determination, upon consultation with the Lender, that the Borrower
has more working capital than it reasonably projects that it will require to
cover its expenses over a rolling ninety (90) day period, and the Borrower does
not have any other foreseeable longer term obligations that it projects it would
not otherwise be able to repay through cash flow generated from operations or
other available sources of capital without the use of such excess working
capital; provided, further, that the making of any such partial payments does
not violate the terms of the Subordination Agreement as then in effect, or if
any such payments would result in such violation, the Senior Lender shall have
waived such violation or consented to the payments.
          (o) Filing of Series E Preferred Stock Statement With Respect to
Shares and Conversion and Exchange of the 2003 Note, Series B Preferred Stock
and Series C Preferred Stock into Series E Preferred Stock. As soon as
practicable following the receipt by the Borrower of the Shareholder Approval,
but in no event later than two (2) business days thereafter, the Borrower shall
file the Series E Preferred Stock Statement With Respect to Shares in
substantially the form of Exhibit C hereto with the Department of State of the
Commonwealth of Pennsylvania and shall effect the conversion and exchange of the
2003 Note, Series B Preferred Stock and Series C Preferred Stock into Series E
Preferred Stock as contemplated by Section 3.5 hereof.
     7.2 Negative Covenants. The Borrower covenants that, so long as all or any
part of the principal amount of the Notes or any interest thereon shall remain
outstanding:
          (a) Indebtedness. The Borrower and the Guarantor shall not create,
incur, assume, guarantee or be or remain liable for, contingently or otherwise,
or suffer to exist any Indebtedness, except:
          (i) Indebtedness under this Agreement;
          (ii) Indebtedness under the Senior Financing, to which payment under
the Notes will be subordinated pursuant to the terms of the Subordination
Agreement;

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provided, however, that the principal amount of indebtedness that may be
incurred under the Senior Financing may not exceed $15,000,000 prior to the
Borrower obtaining the Shareholder Approval, and $20,000,000 after the Borrower
obtains the Shareholder Approval, plus indebtedness that may be incurred under
the confirmation letter between the Borrower and the Senior Lender dated
September 12, 2008 setting forth the terms and conditions of an interest rate
swap transaction (the ‘Existing Swap”) entered into under and pursuant to the
terms and conditions of that certain ISDA Master Agreement between the Borrower
and the Senior Lender dated as of August 6, 2007 and the Schedule related
thereto (together, the “ISDA Agreement”); and provided, further, that the
Borrower may not enter into any other swap or other transactions under the ISDA
Agreement, enter into any other agreement similar to the ISDA Agreement or amend
or modify the terms of the Existing Swap or the ISDA Agreement without the prior
written consent of the Lender, which may be granted or withheld in his sole
discretion;
          (iii) Indebtedness incurred in the ordinary course of business with
respect to customer deposits, trade payables and other unsecured current
liabilities not the result of borrowing and not evidenced by any note or other
evidence of indebtedness; and
          (iv) Permitted Indebtedness; and
          (v) Extensions, renewals and replacements of any Permitted
Indebtedness; provided, however, that there shall be no increase in the
principal amount of Permitted Indebtedness without the prior written consent of
the Lender, which may be granted or withheld in his sole discretion.
          (b) Negative Pledge; Liens. The Borrower and the Guarantor shall not
create, incur, assume or suffer to exist any Lien of any kind on any of its
properties or assets of any kind, except the following (collectively, “Permitted
Liens”):
          (i) Liens now existing or hereafter created in connection with the
Senior Financing, to which Liens the Lender will subordinate its Liens to on the
terms set forth in the Subordination Agreement;
          (ii) Liens for or priority claims imposed by law that are incidental
to the conduct of business or the ownership of properties and assets (including
mechanic’s, warehousemen’s, attorneys’ and statutory landlords’ liens) and
deposits, pledges or liens to secure statutory obligations, surety or appeal
bonds or other liens of like general nature incurred in the ordinary course of
business and not in connection with the borrowing of money; provided, however,
that in each case, the obligation secured thereby shall not be overdue, or, if
overdue, is being contested in good faith and adequate reserves have been set up
by the Borrower;
          (iii) Liens securing the payments of taxes, assessments and
governmental charges or levies incurred in the ordinary course of business that
either (a) are not delinquent, or (b) are being contested in good faith by
appropriate legal or administrative proceedings and as to which adequate
reserves have been set aside on their books, and so long as during the period of
any such contest, the Borrower shall suffer no

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loss of any privilege of doing business or any other right, power or privilege
necessary or material to the operation of the Business;
          (iv) Liens listed on Schedule 7.2(b) hereto; and
          (v) Extensions, renewals and replacements of Liens referred to in
clauses (i) through (iv) of this Section 7.2(b); provided, however, that any
such extension, renewal or replacement Lien shall be limited to the property or
assets covered by the Lien extended, renewed or replaced and that the
obligations secured by any such extension, renewal or replacement Lien shall be
in an amount not greater than the amount of the obligations secured by the Lien
extended, renewed or replaced.
          (c) Contingent Obligations. Neither the Borrower nor the Guarantor
shall create, incur, assume or suffer to exist any Contingent Obligation other
than guarantees by the Borrower of Indebtedness of a Subsidiary, but only to the
extent such Indebtedness is permitted hereunder.
          (d) Mergers, etc. The Borrower shall not merge into or consolidate or
combine with any other Person, or purchase, lease or otherwise acquire (in one
transaction or a series of related transactions) all or any part of the property
or assets of any Person other than purchases or other acquisitions of inventory,
materials, leases, property and equipment in the ordinary course of business.
Except as expressly permitted by the Security Documents, the Borrower shall not
sell, transfer or otherwise dispose of, lease or let others manage any of its
assets, including the collateral under the respective Security Documents.
          (e) Affiliate Transactions. Except as set forth on Schedule 7.2(e),
neither the Borrower nor the Guarantor shall make any loan or advance to any
director, officer or employee of any Borrower or any Affiliate, or enter into or
be a party to any transaction or arrangement with any Affiliate of the Borrower
or such Guarantor, including, without limitation, the purchase from, sale to or
exchange of property with, any merger or consolidation with or into, or the
rendering of any service by or for, any Affiliate, except pursuant to the
reasonable requirements of the Business and upon fair and reasonable terms no
less favorable to the Borrower or such Guarantor than would be obtained in a
comparable arm’s length transaction with a Person other than an Affiliate.
          (f) Dividends and Common Stock Purchases. Neither the Borrower nor the
Guarantor will declare or pay any dividend, or make any distribution on its
outstanding capital stock or any other payment of any kind to any of its
shareholders or its or their Affiliates, other than with respect to the Series D
Preferred Stock or Series E Preferred Stock, provided that Subsidiaries not
formed under the laws of the United States of America or any U.S. state may
declare and pay dividends to their shareholders other than the Borrower and any
other Subsidiaries, in an aggregate amount not exceeding $25,000 per year.
          (g) Advances, Investments and Loans. Neither the Borrower nor the
Guarantor shall purchase, or hold beneficially any stock, other securities or
evidences of Indebtedness of, or make or permit to exist any loan, Guaranty or
advance to, or make any

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investment or acquire any interest whatsoever in, any other Person (including,
but not limited to, the formation or acquisition of any Subsidiaries), except:
          (i) securities issued or directly and fully guaranteed or insured by
the United States of America or any agency or instrumentality thereof having
maturities of not more than six (6) months from the date of acquisition;
          (ii) United States dollar denominated time deposits, certificates of
deposit and bankers acceptances of any bank or any bank whose short-term debt
rating from Standard & Poor’s Ratings Group, a division of The McGraw-Hill
Companies, Inc. (“S&P”), is at least A-1 or the equivalent or from Moody’s
Investors Service, Inc. (“Moody’s”) is at least P-1 or the equivalent with
maturities of not more than six (6) months from the date of acquisition;
          (iii) commercial paper with a rating of at least A-1 or the equivalent
by S&P or at least P-1 or the equivalent by Moody’s maturing within six
(6) months after the date of acquisition;
          (iv) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing within six (6) months from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either S&P or Moody’s;
          (v) Investments in money market funds substantially all the assets of
which are comprised of securities of the types described in clauses (i) through
(iv) above;
          (vi) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with, customers and
suppliers arising in the ordinary course of business;
          (vii) receivables owing to the Borrower created or acquired in the
ordinary course of business and payable on customary trade terms of the
Borrower;
          (viii) deposits made in the ordinary course of business consistent
with past practices to secure the performance of leases or in connection with
bidding on government contracts; and
          (ix) advances to employees in the ordinary course of business for
business expenses; provided, however, that the aggregate amount of such advances
at any time outstanding shall not exceed $100,000.
          (h) Use of Proceeds. The Borrower shall not use any proceeds from the
sale of the Notes hereunder, directly or indirectly, for the purposes of
purchasing or carrying any “margin securities” within the meaning of Regulations
T, U or X promulgated by the Board of Governors of the Federal Reserve Board or
for the purpose of arranging for the extension of

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credit secured, directly or indirectly, in whole or in part by collateral that
includes any “margin securities”.
          (i) Amendment of Charter Documents. Neither the Borrower nor the
Guarantor shall amend, terminate, modify or waive or agree to the amendment,
modification or waiver of any material term or provision of its Charter
Documents or Bylaws, except as specifically contemplated herein. The Borrower
shall not, without the prior written consent of the Lender, issue any shares of
its Preferred Stock other than to the Lender.
          (j) Business. Neither the Borrower nor the Guarantor shall engage,
directly or indirectly, in any business other than the Business.
          (k) Fiscal Year; Accounting. The Borrower shall not change its Fiscal
Year from ending on the last Friday of each February or method of accounting
(other than immaterial changes in methods), except as required by GAAP.
          (l) Establishment of New or Changed Business Locations. The Borrower
shall not relocate its principal executive offices or other facilities or
establish new business locations or store any inventory or other assets at a
location not identified to the Lender on or before the date hereof, without
providing not less than thirty (30) days advance written notice to the Lender.
          (m) Changed or Additional Business Names. Neither the Borrower nor the
Guarantor shall change its corporate name or establish new or additional trade
names without providing not less than thirty (30) days advance written notice to
the Lender.
     7.3 Financial Covenant. The Borrower will maintain as of the end of each
Fiscal Quarter a Consolidated Tangible Net Worth of at least $3,500,000.
ARTICLE VIII
EVENTS OF DEFAULT
     8.1 Events of Default. An Event of Default shall mean the occurrence of one
or more of the following described events:
          (a) the Borrower shall default in the payment of principal and
interest on the Notes when due, whether at maturity, by acceleration or
otherwise;
          (b) the Borrower shall default in the payment of, or any agreement
related to, any of its Obligations, including without limitation if the Lender
is required to make any payment to the Senior Lender under the Personal
Guaranty;
          (c) the Borrower shall default in the payment of (i) interest on any
Senior Debt on its due date or (ii) principal on any Senior Debt, whether at
maturity, upon any scheduled payment date or by acceleration or otherwise;
          (d) the Borrower shall default under any agreement related to the
Senior Financing or under any agreement under which any Indebtedness in an
aggregate principal

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amount of $300,000 or more is created in a manner entitling the holder of such
Indebtedness to accelerate the maturity of such Indebtedness;
          (e) any representation or warranty herein made by the Borrower, or any
certificate or financial statement furnished pursuant to the provisions hereof,
shall prove to have been false or misleading in any material respect as of the
time made or furnished or deemed made or furnished;
          (f) the Borrower or the Guarantor shall default in the performance of
any other covenant, condition or provision of this Agreement, the Notes or the
other Transaction Documents, and such default shall not be remedied for a period
of thirty (30) days after the earlier of (i) written notice from the Lender of
such default or (ii) actual knowledge by the Borrower of such default;
          (g) a proceeding shall have been instituted in a court having
jurisdiction in the premises seeking a decree or order for relief in respect of
the Borrower in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or for the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar
official) of the Borrower or for any substantial part of its property, or for
the winding-up or liquidation of their affairs (an “Insolvency Proceeding”), and
such Insolvency Proceeding shall remain undismissed or unstayed and in effect
for a period of sixty (60) days;
          (h) the Borrower shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, shall
consent to the entry of an order for relief in an involuntary case under any
such law, or shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of the Borrower or for any substantial part of its property,
or shall make a general assignment for the benefit of creditors, or shall fail
generally to pay their debts as they become due, or shall take any action in
furtherance of any of the foregoing;
          (i) both the following events shall occur: (i) a Reportable Event, the
occurrence of which would have a Material Adverse Effect which could cause the
imposition of a Lien under Section 4068 of ERISA, shall have occurred with
respect to any Plan or Plans; and (ii) the aggregate amount of the then “current
liability” (as defined in Section 412(l)(7) of the Internal Revenue Code of
1986, as amended) of all accrued benefits under such Plan or Plans exceeds the
then current value of the assets allocable to such benefits by more than
$1,000,000 at such time;
          (j) a final judgment which, with other undischarged final judgments
against the Borrower, exceeds an aggregate of $300,000 (excluding judgments to
the extent any Borrower are fully insured or the deductible or retention limit
does not exceed $300,000 and with respect to which the insurer has assumed
responsibility in writing), shall have been entered against the Borrower if,
within thirty (30) days after the entry thereof, such judgment shall not have
been discharged or execution thereof stayed pending appeal, or if, within thirty
(30) days after the expiration of any such stay, such judgment shall not have
been discharged;

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          (k) any Transaction Document or Security Document shall at any time
after the Closing Date cease for any reason to be in full force and effect or
shall cease to create perfected security interests in favor of the Lender in the
collateral subject or purported to be subject thereto, subject to no other Liens
other than Permitted Liens, or such collateral shall have been transferred to
any Person without the prior written consent of the Lender;
          (l) the Borrower or the Guarantor (except as otherwise provided
herein) shall terminate its existence, cease to exist, permanently cease
operations or abandon the operation of any material portion of its business; or
          (m) any of the following shall have occurred: (1) a final
non-appealable order is issued by any Governmental Authority, including,
requiring the Borrower or the Guarantor to divest a substantial portion of its
assets pursuant to any antitrust, restraint of trade, unfair competition,
industry regulation, or similar requirement of Law, or (ii) any Governmental
Authority shall condemn, seize or otherwise appropriate, or take custody or
control of all or any substantial portion of the assets of the Borrower or the
Guarantor.
     8.2 Consequences of Event of Default.
          (a) Bankruptcy. If an Event of Default specified in paragraphs (g) or
(h) of Section 8.1 hereof shall occur, the unpaid principal balance of the Notes
and interest accrued thereon and all other liabilities of the Borrower to the
Lender hereunder and thereunder shall be immediately due and payable, without
presentment, demand, protest or (except as expressly required hereby) notice of
any kind, all of which are hereby expressly waived.
          (b) Other Defaults. If any other Event of Default shall occur, the
Lender may at his option, by written notice to the Borrower, declare the entire
unpaid principal balance of the Notes, the 2003 Note and the 2009 Bridge Note
and interest accrued thereon and all other liabilities of the Borrower hereunder
and thereunder to be forthwith due and payable, and the same shall thereupon
become immediately due and payable, without presentment, demand, protest or
(except as expressly required hereby) notice of any kind, all of which are
hereby expressly waived.
          (c) Default Interest. Following the occurrence and during the
continuance of any Event of Default, the Lender shall be entitled to receive, to
the extent permitted by applicable law, interest on the outstanding principal
of, and premium and overdue interest, if any, on, the Notes at a rate per annum
equal to the interest rate thereon (determined as provided in Section 3.1) plus
six percent (6%).
     8.3 Security. Payments of principal of, and interest on, the Notes and all
other obligations of the Borrower under this Agreement or the Notes are secured
pursuant to the terms of the Security Documents.
ARTICLE IX
MISCELLANEOUS
     9.1 Survival. All covenants, agreements, representations and warranties
made in any of the Transaction Documents or any certificate or instrument
delivered to the Lender pursuant to

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or in connection with any of the Transaction Documents, shall survive the
execution and delivery of all of the Transaction Documents, and the issuance,
sale and delivery of the Notes and the Warrants. For the avoidance of doubt, no
payment shall be deemed to have been indefeasibly paid in full, whether made by
the Borrower or the Guarantor or any other person, which is required to be
refunded pursuant to any bankruptcy or insolvency law; it being understood that
no payment so refunded shall be considered as a payment of any portion of the
Credit Facility, nor shall it have the effect of reducing the obligation or the
liability of the Borrower or the Guarantor hereunder or any Transaction
Document.
     9.2 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, except that (i) the Borrower may not assign or transfer its rights or
obligations hereunder or any interest herein or delegate their duties hereunder
and (ii) the Lender shall have the right to assign his rights hereunder and
under the Securities in accordance with Article 6.
     9.3 Modifications and Amendments. The provisions of this Agreement may be
modified, waived or amended, but only by a written instrument signed by the
Borrower and the Lender.
     9.4 No Implied Waivers; Cumulative Remedies; Writing Required. No delay or
failure in exercising any right, power or remedy hereunder shall affect or
operate as a waiver thereof; nor shall any single or partial exercise thereof or
any abandonment or discontinuance of steps to enforce such a right, power or
remedy preclude any further exercise thereof or of any other right, power or
remedy. The rights and remedies hereunder are cumulative and not exclusive of
any rights or remedies that the Lender would otherwise have. Any waiver, permit,
consent or approval of any kind or character of any breach or default under this
Agreement or any such waiver of any provision or condition of this Agreement
must be in writing and shall be effective only to the extent in such writing
specifically set forth.
     9.5 Reimbursement of Expenses. The Borrower shall, within two (2) business
days after each Closing, reimburse the reasonable fees and out-of-pocket
expenses of Royer & Associates LLC, counsel to the Lender, in an amount not to
exceed $35,000 in the aggregate. In the alternative, the Lender may effect such
reimbursement at any Closing by withholding from the amount of the applicable
Note specified in Article II the amount to which the Lender’s counsel is
entitled to reimbursement pursuant to the preceding sentence. Notwithstanding
the withholding of such amount, the Lender shall be deemed to have loaned to the
Borrower the full amount so withheld.
     9.6 Holidays. Whenever any payment or action to be made or taken hereunder
or under the Notes shall be stated to be due on a day which is not a Business
Day, such payment or action shall be made or taken on the next following
Business Day, and such extension of time shall be included in computing interest
or fees, if any, in connection with such payment or action.
     9.7 Notices. All notices and other communications given to or made upon any
party hereto in connection with this Agreement shall, except as otherwise
expressly herein provided, be in writing (including telecopy, but in such case,
a confirming copy will be sent by another

42

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permitted means) and mailed via certified mail, telecopied or delivered by
guaranteed overnight parcel express service or courier to the respective
parties, as follows:
to the Borrower:
Environmental Tectonics Corporation
County Line Industrial Park
125 James Way
Southampton, PA 18966-3877
Attn: Chief Financial Officer
Telecopier: (215) 357-4000
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attn: William W. Matthews, Esquire
Telecopier: (215) 568-6603
to the Lender:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
Attn: H.F. Lenfest
Telecopier: (610) 940-0602
with a copy to:
Royer & Associates LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406
Attn: John E. Royer, Jr., Esquire
Telecopier: (610) 354-8896
or in accordance with any subsequent written direction from the recipient party
to the sending party. All such notices and other communications shall, except as
otherwise expressly herein provided, be effective upon delivery if delivered by
courier or overnight parcel express service; in the case of certified mail,
three (3) Business Days after the date sent; or in the case of telecopy, when
received.
     9.8 Governing Law and Consent to Jurisdiction.
          (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT REGARD TO CONFLICT
OF LAWS PRINCIPLES.

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          (b) The Borrower irrevocably and unconditionally agrees that any suit,
action or other legal proceeding arising out of this Agreement shall be brought
exclusively in the courts of record in Montgomery County, Commonwealth of
Pennsylvania, or the United States District Court for the Eastern District of
Pennsylvania; consents to personal jurisdiction in each such court in any such
suit, action or proceeding; and waives any objection concerning venue with
respect to any suit, action or proceeding in any of such courts.
     9.9 Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law in any jurisdiction, such provision shall be ineffective
only to the extent of such prohibition or invalidity, without invalidating any
other provision of this Agreement.
     9.10 Headings. Article, section and subsection headings in this Agreement
are included for convenience of reference only and shall not constitute a part
of this Agreement for any other purpose.
     9.11 Counterparts. This Agreement may be executed in any number of
counterparts and by either party hereto on separate counterparts, each of which,
when so executed and delivered, shall be an original, but all such counterparts
shall together constitute one and the same instrument.
     9.12 Integration. This Agreement and the other Transaction Documents set
forth the entire understanding of the parties hereto with respect to all matters
contemplated hereby and supersede all previous agreements and understandings
among them concerning such matters. No statements or agreements, oral or
written, made prior to or at the signing hereof, shall vary, waive or modify the
written terms hereof.
     9.13 Subordination. The obligations evidenced hereby are subordinate in the
manner and to the extent set forth in the Subordination Agreement, to the
indebtedness and other liabilities owed by the Borrower under and pursuant to
the Senior Credit Agreement and each related “Loan Document” (as defined
therein), and the Lender, by his acceptance of the Notes, acknowledges and
agrees to be bound by the provisions of the Subordination Agreement.
     9.14 Indemnification. The Borrower shall, with respect to the
representations, warranties and agreements made by it herein, indemnify, defend
and hold the Lender and the Lender’s respective officers, directors,
stockholders, employees and agents and their respective Affiliates (the
“Indemnitees”), harmless against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever, including, without limitation,
the reasonable fees and disbursements of counsel for such Indemnitees in
connection with any investigative, administrative or judicial proceeding,
whether or not such Indemnitees shall be designated a party thereto, which may
be (i) imposed on such Indemnitees, (ii) incurred by such Indemnitees, or
(iii) asserted against such Indemnitees by a third party, as a result of the
misrepresentation or breach of any representation, warranty or covenant of the
Borrower under this Agreement or in any other Transaction Document or to the
nonfulfillment of or failure to perform any covenant or agreement on the part of
the Borrower contained in this Agreement or any other Transaction Document. The
Borrower

44

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and the Lender hereby agree to resolve any claim for indemnification under this
Section 9.14 pursuant to the procedures for indemnification set forth in
Section 6 of the Registration Rights Agreement.
     9.15 WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY WAIVES ANY AND ALL
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE
BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
     9.16 CONFESSION OF JUDGMENT. THE BORROWER HEREBY IRREVOCABLY AUTHORIZES AND
EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT IN
THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR THE BORROWER AT ANY
TIME OR TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS AGREEMENT,
THE NOTE(S) OR THE SECURITY AGREEMENT, IN ANY SUCH COURT IN ANY ACTION BROUGHT
AGAINST THE BORROWER BY THE LENDER WITH RESPECT TO THE AGGREGATE AMOUNTS PAYABLE
HEREUNDER, WITH OR WITHOUT DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO
CONFESS OR ENTER JUDGMENT AGAINST THE BORROWER FOR ALL SUMS PAYABLE BY THE
BORROWER TO THE LENDER HEREUNDER, AS EVIDENCED BY AN AFFIDAVIT SIGNED BY A DULY
AUTHORIZED DESIGNEE OF THE LENDER SETTING FORTH SUCH AMOUNT THEN DUE FROM THE
BORROWER TO THE LENDER, PLUS AN ATTORNEY’S COMMISSION EQUAL TO TEN PERCENT (10%)
OF THE SUMS THEN OUTSTANDING UNDER THIS AGREEMENT AND THE NOTES, BUT IN NO EVENT
LESS THAN $25,000, WITH COSTS OF SUIT, RELEASE OF PROCEDURAL ERRORS, OTHER THAN
NOTICES THAT MAY BE REQUIRED HEREUNDER, AND WITHOUT RIGHT OF APPEAL. IF A COPY
OF THIS AGREEMENT AND/OR A NOTE, VERIFIED BY AN AFFIDAVIT, SHALL HAVE BEEN FILED
IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF
ATTORNEY. THE BORROWER WAIVES THE RIGHT TO ANY STAY OF EXECUTION, THE BENEFIT OF
ALL EXEMPTION LAWS NOW OR HEREAFTER IN EFFECT AND ANY AND ALL RIGHTS TO PRIOR
NOTICE AND HEARING WITH RESPECT TO THE GARNISHMENT OR ATTACHMENT OF ANY PROPERTY
PURSUANT TO A JUDGMENT ENTERED HEREUNDER. NO SINGLE EXERCISE OF THE FOREGOING
WARRANT AND POWER TO BRING ANY ACTION OR CONFESS JUDGMENT THEREIN SHALL BE
DEEMED TO EXHAUST THE POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY
BE EXERCISED FROM TIME TO TIME AS OFTEN AS THE LENDER SHALL ELECT UNTIL ALL
AMOUNTS PAYABLE TO THE LENDER HEREUNDER, SHALL HAVE BEEN PAID IN FULL. THE
EXERCISE BY THE LENDER OF HIS RIGHTS AND REMEDIES AND THE ENTRY OF ANY JUDGMENT
BY THE LENDER UNDER THIS SECTION SHALL NOT AFFECT IN ANY WAY THE INTEREST RATE
PAYABLE HEREUNDER OR ANY OTHER AMOUNTS DUE TO THE LENDER, BUT INTEREST

45

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SHALL CONTINUE TO ACCRUE ON SUCH AMOUNTS AT THE DEFAULT RATE (AS DEFINED IN THE
NOTES).
* * *

46

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SIGNATURE PAGE TO SECURED CREDIT FACILITY AND
WARRANT PURCHASE AGREEMENT
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

            BORROWER:

ENVIRONMENTAL TECTONICS CORPORATION
      By:   /s/ Duane D. Deanes       Name:   Duane D. Deanes       Title:   CFO
      LENDER:

/s/ H.F. Lenfest     H.F. Lenfest                

Joy Tartar
 
Witness

47

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ANNEXES
SCHEDULES

     
Certain Employees
  (Schedule 4.1(f)(iv)
Permitted Indebtedness
  (Schedule 5.1(c))
Capitalization
  (Schedule 5.1(f))
Litigation
  (Schedule 5.1(j))
Compliance with Laws
  (Schedule 5.1(k))
Environmental
  (Schedule 5.1(l))
Properties
  (Schedule 5.1(q))
Intellectual Property
  (Schedule 5.1(r))
Subsidiaries
  (Schedule 5.1(t))
Absence of Undisclosed Liabilities
  (Schedule 5.1(v))
Security Documents
  (Schedule 5.1(y))
Insurance
  (Schedule 5.1(z))
Authorizations
  (Schedule 5.1(aa))
Consents
  (Schedule 5.1(bb))
Defaults
  (Schedule 5.1(ee))
Permitted Encumbrances
  (Schedule 7.2(b))
Affiliate Transactions
  (Schedule 7.2(e))

EXHIBITS

     
EXHIBIT A-1
  Form of Senior Secured Subordinated Initial Note
EXHIBIT A-2
  Form of Senior Secured Subordinated Additional Note
EXHIBIT B-1
  Form of Initial Stock Purchase Warrant
EXHIBIT B-2
  Form of Additional Stock Purchase Warrant
EXHIBIT B-3
  Form of Guaranty Warrant
EXHIBIT C
  Form of Statement With Respect to Shares of Series E Stock
EXHIBIT D
  Form of Statement With Respect to Shares of Series D Stock
EXHIBIT E
  Form of Security Agreement
EXHIBIT F
  Form of Registration Rights Agreement
EXHIBIT G
  Form of Guaranty Agreement
EXHIBIT H
  Form of Mortgage
EXHIBIT I
  Form of Shareholders Voting Agreement
EXHIBIT J
  [Intentionally deleted.]
EXHIBIT K
  [Intentionally deleted.]
EXHIBIT L
  Form of Closing Certificate
EXHIBIT M
  2009 Bridge Loan Documents
EXHIBIT N
  Form of Compliance Certificate

 

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

 

EXHIBIT A-1
FORM OF SENIOR SECURED SUBORDINATED INITIAL NOTE
NEITHER THIS NOTE NOR THE SHARES OF PREFERRED STOCK THAT MAY BE ISSUABLE UPON
PAYMENT OF INTEREST HEREON HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS,
EXCEPT AS EXPRESSLY PROVIDED HEREIN, AND MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED AND THAT THE PROPOSED TRANSFER MAY BE MADE WITHOUT VIOLATION OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW.

      $1,000,000   ____________, 2009

ENVIRONMENTAL TECTONICS CORPORATION
SENIOR SECURED SUBORDINATED PROMISSORY NOTE
     ENVIRONMENTAL TECTONICS CORPORATION (the “Company”), a Pennsylvania
corporation, for value received, and intending to be legally bound, hereby
unconditionally promises to pay to the order of H.F. Lenfest (the “Lender”), or
any assignee or holder hereof (together with the Lender, a “Holder”), the
principal sum of One Million Dollars ($1,000,000), plus all accrued and unpaid
interest at the rates provided herein, in lawful money of the United States of
America. The obligations of the Company under this Senior Secured Subordinated
Promissory Note (this “Note”) are secured as set forth in the Security Agreement
dated as of April 24, 2009 between the Company and the Lender. Capitalized terms
used herein and not defined herein shall have the meanings assigned to them in
the Secured Credit Facility and Warrant Purchase Agreement, dated as of
April 24, 2009, by and between the Company and the Lender (as amended, restated
or otherwise modified, the “Purchase Agreement”).
     Payments of principal or interest on this Note shall be made in lawful
money of the United States of America by wire transfer to a bank account
designated by the Holder.
     1. Principal Payments. The outstanding principal balance of this Note,
together with all accrued and unpaid interest thereon, shall be due and payable
five (5) Business Days following the Shareholder Approval Date (the “Maturity
Date”), unless such payment obligation is accelerated pursuant to Section 5
hereof; provided, however, that the Maturity Date shall be extended
automatically to ____, 2012 in the event the Company receives the Shareholder
Approval by the initial Maturity Date.

 

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

 

     2. Interest.
          (a) Interest Rate. Interest shall accrue on the outstanding principal
amount hereof at a rate of fifteen percent (15%) per annum, compounded annually
(the “Interest Rate”), until paid in full; provided, however, that the Interest
Rate shall be reduced automatically to ten percent (10%) per annum, compounded
annually, retroactively from the date of issuance of this Note (the “Issue
Date”) in the event the Company receives the Shareholder Approval.
          (b) Payment of Interest. Interest shall be payable, at the option of
the Lender, on each anniversary date of this Note, with any accrued and unpaid
interest due and payable on the Maturity Date. The Lender shall deliver to the
Company at least five (5) days prior written notice if it wishes to elect to be
paid interest on any anniversary date. Interest payable hereunder will be
computed on the basis of a year of 365 days, for the number of actual days
elapsed during which principal is outstanding. Interest may be payable, in the
sole discretion of the Lender, in cash or in shares of Series D Convertible
Preferred Stock, par value $0.05 per share, of the Company (“Series D Preferred
Stock”), which number of shares of Series D Preferred Stock to be determined by
dividing the amount of interest due on an interest payment date by $1,000.00,
the stated value of the Series D Preferred Stock.
          (c) Default Rate. If an Event of Default (hereinafter defined) shall
occur and be continuing, then, and in any such event, interest shall accrue on
the unpaid principal balance from time to time outstanding hereunder at the rate
of the Interest Rate plus six percent (6%) per annum (the “Default Rate”) until
the entire principal evidenced by this Note and all accrued interest thereon is
paid in full or the Event of Default is cured within the applicable cure period.
     3. Subordination.
          (a) To the extent there is any conflict between the provisions of this
Section 3 and the other provisions of this Note, the provisions of this
Section 3 shall control. By its acceptance of this Note, the Lender and any
subsequent holder hereof agrees to the terms and conditions of this Section 3.
          (b) The Lender hereby subordinates this Note and the right to receive
payments of principal and interest on this Note to the Senior Lender.
Notwithstanding the respective dates of attachment or perfection of any security
interest of the Lender and the security interest of the Senior Lender, the
security interest of the Senior Lender in the property of the Company shall at
all times be prior to the security interest of the Lender. The Lender hereby
agrees to execute and deliver to the Senior Lender any reasonable subordination
agreement in favor of the Senior Lender that the Senior Lender may require the
Lender to execute.
     4. Transfer of Securities.
          (a) Restrictions on Transfer. Except as expressly set forth herein, by
accepting this Note, the Holder hereby acknowledges that this Note, and except
as expressly set forth in the Registration Rights Agreement, the shares of
Series D Preferred Stock that may be issuable in payment of interest on this
Note, will not be registered under the Securities Act of 1933, as amended (the
“Securities Act”), or any state securities laws. The Holder represents that it
is acquiring this Note for its own account, for investment purposes only and not
with a view to,

(2)

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

 

or for sale in connection with, any distribution of such securities.
Notwithstanding the foregoing, subject to all applicable securities laws, the
Holder may transfer this Note or any shares of Series D Preferred Stock (or any
interest therein) without violation of the Securities Act or any applicable
state securities law; provided, however, that the Holder shall not transfer this
Note or any shares of Series D Preferred Stock to a competitor of the Company,
or its subsidiaries or affiliates. No transfer of this Note shall be deemed
effective to the extent that such transfer conflicts with applicable federal or
state securities laws.
          (b) Recording of Transfer. The transfer of the Note, or of any right
to the principal thereof, and stated interest thereon, may be effected only by
surrender of the Note to the Company and the issuance of a new note in the name
of the transferee.
     5. Default. If any of the following conditions or events (each an “Event of
Default”) shall occur and be continuing, then, and in any such event, the Holder
may at any time (unless such Event of Default shall theretofore have been
remedied) at its option, by written notice to the Company, declare the Note to
be due and payable, whereupon the Note shall forthwith mature and become due and
payable, without presentment, demand, protest or notice, all of which are hereby
waived. In addition, in such case the Company will pay to the Holder such
further amount as shall have been incurred by the Holder as the costs and
expenses of collection, including reasonable attorneys’ fees.
          (a) If the Company shall default in the payment of principal or
interest on this Note when the same becomes due and payable, whether on the
Maturity Date or by declaration of acceleration or otherwise and such default
shall not have been remedied within five (5) days after the date such payment
was due.
          (b) If an Event of Default shall have occurred under the Purchase
Agreement and such Event of Default shall not have been cured within the
applicable cure period.
     6. Miscellaneous.
          (a) All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopy, sent by nationally
recognized, overnight courier service, or sent by registered or certified mail,
postage prepaid, as follows:
If to the Holder:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
Attn: H.F. Lenfest
Telecopier: (610) 940-0602

(3)

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with a copy to:
Royer & Associates LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406
Attn: John E. Royer, Jr., Esquire
Telecopier: (610) 354-8896
If to the Company:
Environmental Tectonics Corporation
County Line Industrial Park
125 James Way
Southampton, PA 18966-3877
Attn: Chief Financial Officer
Telecopier: (215) 357-4000
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attn: William W. Matthews, Esquire
Telecopier: (215) 568-6603
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be effective on the earlier of (i) the date
of delivery to the addressee, or (ii) five business days after it has been
mailed, or (iii) three business days after delivery by a nationally recognized
courier service.
          (b) The Lender shall have the right, without obligation, to grant
extensions of time or indulgences without affecting the liability of the
Company, including periods when payment is not permitted under the Subordination
Agreement.
          (c) Upon receipt by the Company from a Holder of (i) evidence of the
loss, theft, destruction or mutilation of any Note and (ii) (y) in the case of
loss, theft or destruction, of indemnity (without any bond or other security)
reasonably satisfactory to the Company, or (z) in the case of mutilation, upon
surrender and cancellation of any Note, the Company shall execute and deliver a
new Note of like tenor and date. However, the Company shall not be obligated to
reissue such lost or stolen Note if the Holder contemporaneously requests the
Company to convert such Note.
          (d) Nothing contained in this Note shall be construed as confessing
upon the Holder or any other person the right to vote or to consent or to
receive notice as a shareholder of the Borrower.

(4)

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          (e) This Note shall be governed by the laws of the Commonwealth of
Pennsylvania without regard to the conflict of law provisions thereof. The
Company irrevocably and unconditionally agrees that any suit, action or other
legal proceeding arising out of this Note may be brought in the courts of record
in Montgomery County, Commonwealth of Pennsylvania, or the United States
District Court for the Eastern District of Pennsylvania; consents to personal
jurisdiction in each such court in any such suit, action or proceeding; and
waives any objection concerning venue with respect to any suit, action or
proceeding in any of such courts.
          (f) Notwithstanding any provision contained in this Note to the
contrary, the Company’s liability for payment of interest shall not exceed the
limits imposed by applicable usury law. If any provision hereof requires
interest payments in excess of the then legally permitted maximum rate, such
provision shall automatically be deemed to require such payment at the then
legally permitted maximum rate; provided, however, that in such event the
Conversion Price shall be adjusted to preserve the economic effects of the
transaction contemplated by the Purchase Agreement.
          (g) Subject to Section 4 hereof, this Note shall be binding on the
Company, its successors and assigns, and shall inure to the benefit of the
Holder and the Holder’s successors, assigns, legal representatives, heirs and
guardians.
          (h) In the event of the commencement of a lawsuit or other proceeding
to enforce any of the terms of this Note, the prevailing party shall be entitled
to recover reasonable attorney’s fees and related out-of-pocket expenses.
          (i) WAIVER OF JURY TRIAL. THE COMPANY IRREVOCABLY WAIVES ANY AND ALL
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE COMPANY
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
          (j) CONFESSION OF JUDGMENT. THE COMPANY HEREBY IRREVOCABLY AUTHORIZES
AND EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT
IN THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR THE COMPANY AT
ANY TIME OR TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS NOTE,
THE PURCHASE AGREEMENT OR THE SECURITY AGREEMENT, IN ANY SUCH COURT IN ANY
ACTION BROUGHT AGAINST THE COMPANY BY THE LENDER WITH RESPECT TO THE AGGREGATE
AMOUNTS PAYABLE HEREUNDER, WITH OR WITHOUT DECLARATION FILED, AS OF ANY TERM,
AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST THE COMPANY FOR ALL SUMS
PAYABLE BY THE COMPANY TO THE LENDER HEREUNDER, AS EVIDENCED BY AN AFFIDAVIT
SIGNED BY A DULY AUTHORIZED DESIGNEE OF THE LENDER SETTING FORTH SUCH AMOUNT
THEN DUE FROM THE COMPANY TO THE LENDER, PLUS AN ATTORNEY’S COMMISSION EQUAL TO
TEN PERCENT (10%) OF THE SUMS THEN OUTSTANDING UNDER THIS NOTE OR THE PURCHASE

(5)

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AGREEMENT, BUT IN NO EVENT LESS THAN $25,000, WITH COSTS OF SUIT, RELEASE OF
PROCEDURAL ERRORS, OTHER THAN NOTICES THAT MAY BE REQUIRED HEREUNDER, AND
WITHOUT RIGHT OF APPEAL. IF A COPY OF THIS NOTE AND/OR THE PURCHASE AGREEMENT,
VERIFIED BY AN AFFIDAVIT, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE
NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. THE COMPANY WAIVES THE
RIGHT TO ANY STAY OF EXECUTION, THE BENEFIT OF ALL EXEMPTION LAWS NOW OR
HEREAFTER IN EFFECT AND ANY AND ALL RIGHTS TO PRIOR NOTICE AND HEARING WITH
RESPECT TO THE GARNISHMENT OR ATTACHMENT OF ANY PROPERTY PURSUANT TO A JUDGMENT
ENTERED HEREUNDER. NO SINGLE EXERCISE OF THE FOREGOING WARRANT AND POWER TO
BRING ANY ACTION OR CONFESS JUDGMENT THEREIN SHALL BE DEEMED TO EXHAUST THE
POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE EXERCISED FROM TIME
TO TIME AS OFTEN AS THE LENDER SHALL ELECT UNTIL ALL AMOUNTS PAYABLE TO THE
LENDER HEREUNDER, SHALL HAVE BEEN PAID IN FULL. THE EXERCISE BY THE LENDER OF
HIS RIGHTS AND REMEDIES AND THE ENTRY OF ANY JUDGMENT BY THE LENDER UNDER THIS
SECTION SHALL NOT AFFECT IN ANY WAY THE INTEREST RATE PAYABLE HEREUNDER OR ANY
OTHER AMOUNTS DUE TO THE LENDER, BUT INTEREST SHALL CONTINUE TO ACCRUE ON SUCH
AMOUNTS AT THE DEFAULT RATE.
THIS NOTE WAS ISSUED WITH “ORIGINAL ISSUE DISCOUNT.” FOR INFORMATION REGARDING
THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE, AND THE
YIELD TO MATURITY, HOLDERS SHOULD CONTACT ENVIRONMENTAL TECTONICS CORP.,
ATTENTION: CHIEF FINANCIAL OFFICER, 125 JAMES WAY, SOUTHAMPTON, PENNSYLVANIA
18966-3877, TELEPHONE NUMBER: (215) 355-9100.
* * *

(6)

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     IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer as of the day and year first above written.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:        

(7)

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EXHIBIT A-2
FORM OF SENIOR SECURED SUBORDINATED ADDITIONAL NOTE
NEITHER THIS NOTE NOR THE SHARES OF PREFERRED STOCK THAT MAY BE ISSUABLE UPON
PAYMENT OF INTEREST HEREON HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS,
EXCEPT AS EXPRESSLY PROVIDED HEREIN, AND MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED AND THAT THE PROPOSED TRANSFER MAY BE MADE WITHOUT VIOLATION OF THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW.

      $____________   ____________ ___, 2009

ENVIRONMENTAL TECTONICS CORPORATION
SENIOR SECURED SUBORDINATED PROMISSORY NOTE
     ENVIRONMENTAL TECTONICS CORPORATION (the “Company”), a Pennsylvania
corporation, for value received, and intending to be legally bound, hereby
unconditionally promises to pay to the order of H.F. Lenfest (the “Lender”), or
any assignee or holder hereof (together with the Lender, a “Holder”), the
principal sum of _______________ Dollars ($____________), as increased pursuant
to Section 2(c) hereof, plus all accrued and unpaid interest at the rates
provided herein, in lawful money of the United States of America. The
obligations of the Company under this Senior Secured Subordinated Promissory
Note (this “Note”) are secured as set forth in the Security Agreement dated as
of April 24, 2009 between the Company and the Lender. Capitalized terms used
herein and not defined herein shall have the meanings assigned to them in the
Secured Credit Facility and Warrant Purchase Agreement, dated as of April 24,
2009, by and between the Company and the Lender (as amended, restated or
otherwise modified, the “Purchase Agreement”).
     Payments of principal or interest on this Note shall be made in lawful
money of the United States of America by wire transfer to a bank account
designated by the Holder.
     1. Principal Payments. The outstanding principal balance of this Note,
together with all accrued and unpaid interest thereon, shall be due and payable
on the earlier of (i) three (3) years from the date hereof or (ii) December 31,
2012 (such earlier date, the “Maturity Date”), unless such payment obligation is
accelerated pursuant to Section 5 hereof.

 

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

 

     2. Interest.
          (a) Interest Rate. Interest shall accrue on the outstanding principal
amount hereof at a rate of ten percent (10%) per annum, compounded annually (the
“Interest Rate”), until paid in full.
          (b) Payment of Interest. Interest shall be payable at the option of
the Lender, on each anniversary date of this Note, with any accrued and unpaid
interest due and payable on the Maturity Date. The Lender shall deliver to the
Company at least five (5) days prior written notice if he wishes to be paid
interest on an anniversary date. Interest payable hereunder will be computed on
the basis of a year of 365 days, for the number of actual days elapsed during
which principal is outstanding. Interest may be payable, in the sole discretion
of the Lender, in cash or in shares of Series D Convertible Preferred Stock, par
value $0.05 per share, of the Company (“Series D Preferred Stock”), which number
of shares of Series D Preferred Stock to be determined by dividing the amount of
interest due on an interest payment date by $1,000.00, the stated value of the
Series D Preferred Stock.
          (c) Default Rate. If an Event of Default (hereinafter defined) shall
occur and be continuing, then, and in any such event, interest shall accrue on
the unpaid principal balance from time to time outstanding hereunder at the rate
of the Interest Rate plus six percent (6%) per annum (the “Default Rate”) until
the entire principal evidenced by this Note and all accrued interest thereon is
paid in full or the Event of Default is cured within the applicable cure period.
     3. Subordination.
          (a) To the extent there is any conflict between the provisions of this
Section 3 and the other provisions of this Note, the provisions of this
Section 3 shall control. By its acceptance of this Note, the Lender and any
subsequent holder hereof agrees to the terms and conditions of this Section 3.
          (b) The Lender hereby subordinates this Note and the right to receive
payments of principal and interest on this Note to the Senior Lender.
Notwithstanding the respective dates of attachment or perfection of any security
interest of the Lender and the security interest of the Senior Lender, the
security interest of the Senior Lender in the property of the Company shall at
all times be prior to the security interest of the Lender. The Lender hereby
agrees to execute and deliver to the Senior Lender any reasonable subordination
agreement in favor of the Senior Lender that the Senior Lender may require the
Lender to execute.
     4. Transfer of Securities.
          (a) Restrictions on Transfer. Except as expressly set forth herein, by
accepting this Note, the Holder hereby acknowledges that this Note, and except
as expressly set forth in the Registration Rights Agreement, the shares of
Series D Preferred Stock that may be issuable in payment of interest on this
Note, will not be registered under the Securities Act of 1933, as amended (the
“Securities Act”), or any state securities laws. The Holder represents that it
is acquiring this Note for its own account, for investment purposes only and not
with a view to, or for sale in connection with, any distribution of such
securities. Notwithstanding the foregoing, subject to all applicable securities
laws, the Holder may transfer this Note or any

(2)

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

 

shares of Series D Preferred Stock (or any interest therein) without violation
of the Securities Act or any applicable state securities law; provided, however,
that the Holder shall not transfer this Note or any shares of Series D Preferred
Stock to a competitor of the Company, or its subsidiaries or affiliates. No
transfer of this Note shall be deemed effective to the extent that such transfer
conflicts with applicable federal or state securities laws.
          (b) Recording of Transfer. The transfer of the Note, or of any right
to the principal thereof, and stated interest thereon, may be effected only by
surrender of the Note to the Company and the issuance of a new note in the name
of the transferee.
     5. Default. If any of the following conditions or events (each an “Event of
Default”) shall occur and be continuing, then, and in any such event, the Holder
may at any time (unless such Event of Default shall theretofore have been
remedied) at its option, by written notice to the Company, declare the Note to
be due and payable, whereupon the Note shall forthwith mature and become due and
payable, without presentment, demand, protest or notice, all of which are hereby
waived. In addition, in such case the Company will pay to the Holder such
further amount as shall have been incurred by the Holder as the costs and
expenses of collection, including reasonable attorneys’ fees.
          (a) If the Company shall default in the payment of principal or
interest on this Note when the same becomes due and payable, whether on the
Maturity Date or by declaration of acceleration or otherwise and such default
shall not have been remedied within five (5) days after the date such payment
was due.
          (b) If an Event of Default shall have occurred under the Purchase
Agreement and such Event of Default shall not have been cured within the
applicable cure period.
     6. Miscellaneous.
          (a) All notices, requests or instructions hereunder shall be in
writing and delivered personally, sent by telecopy, sent by nationally
recognized, overnight courier service, or sent by registered or certified mail,
postage prepaid, as follows:
If to the Holder:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
Attn: H.F. Lenfest
Telecopier: (610) 940-0602
with a copy to:
Royer & Associates LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406
Attn: John E. Royer, Jr., Esquire
Telecopier: (610) 354-8896

(3)

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

 

If to the Company:
Environmental Tectonics Corporation
County Line Industrial Park
125 James Way
Southampton, PA 18966-3877
Attn: Chief Financial Officer
Telecopier: (215) 357-4000
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attn: William W. Matthews, Esquire
Telecopier: (215) 568-6603
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt. All notices, requests or instructions
given in accordance herewith shall be effective on the earlier of (i) the date
of delivery to the addressee, or (ii) five business days after it has been
mailed, or (iii) three business days after delivery by a nationally recognized
courier service.
          (b) The Lender shall have the right, without obligation, to grant
extensions of time or indulgences without affecting the liability of the
Company, including periods when payment is not permitted under the Subordination
Agreement.
          (c) Upon receipt by the Company from a Holder of (i) evidence of the
loss, theft, destruction or mutilation of any Note and (ii) (y) in the case of
loss, theft or destruction, of indemnity (without any bond or other security)
reasonably satisfactory to the Company, or (z) in the case of mutilation, upon
surrender and cancellation of any Note, the Company shall execute and deliver a
new Note of like tenor and date. However, the Company shall not be obligated to
reissue such lost or stolen Note if the Holder contemporaneously requests the
Company to convert such Note.
          (d) Nothing contained in this Note shall be construed as confessing
upon the Holder or any other person the right to vote or to consent or to
receive notice as a shareholder of the Borrower.
          (e) This Note shall be governed by the laws of the Commonwealth of
Pennsylvania without regard to the conflict of law provisions thereof. The
Company irrevocably and unconditionally agrees that any suit, action or other
legal proceeding arising out of this Note may be brought in the courts of record
in Montgomery County, Commonwealth of Pennsylvania, or the United States
District Court for the Eastern District of Pennsylvania; consents to personal
jurisdiction in each such court in any such suit, action or proceeding; and
waives any objection concerning venue with respect to any suit, action or
proceeding in any of such courts.

(4)

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

 

          (f) Notwithstanding any provision contained in this Note to the
contrary, the Company’s liability for payment of interest shall not exceed the
limits imposed by applicable usury law. If any provision hereof requires
interest payments in excess of the then legally permitted maximum rate, such
provision shall automatically be deemed to require such payment at the then
legally permitted maximum rate; provided, however, that in such event the
Conversion Price shall be adjusted to preserve the economic effects of the
transaction contemplated by the Purchase Agreement.
          (g) Subject to Section 4 hereof, this Note shall be binding on the
Company, its successors and assigns, and shall inure to the benefit of the
Holder and the Holder’s successors, assigns, legal representatives, heirs and
guardians.
          (h) In the event of the commencement of a lawsuit or other proceeding
to enforce any of the terms of this Note, the prevailing party shall be entitled
to recover reasonable attorney’s fees and related out-of-pocket expenses.
          (i) WAIVER OF JURY TRIAL. THE COMPANY IRREVOCABLY WAIVES ANY AND ALL
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY
NATURE RELATING TO THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
NOTE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE COMPANY
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
          (j) CONFESSION OF JUDGMENT. THE COMPANY HEREBY IRREVOCABLY AUTHORIZES
AND EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT
IN THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR THE COMPANY AT
ANY TIME OR TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS NOTE,
THE PURCHASE AGREEMENT OR THE SECURITY AGREEMENT, IN ANY SUCH COURT IN ANY
ACTION BROUGHT AGAINST THE COMPANY BY THE LENDER WITH RESPECT TO THE AGGREGATE
AMOUNTS PAYABLE HEREUNDER, WITH OR WITHOUT DECLARATION FILED, AS OF ANY TERM,
AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST THE COMPANY FOR ALL SUMS
PAYABLE BY THE COMPANY TO THE LENDER HEREUNDER, AS EVIDENCED BY AN AFFIDAVIT
SIGNED BY A DULY AUTHORIZED DESIGNEE OF THE LENDER SETTING FORTH SUCH AMOUNT
THEN DUE FROM THE COMPANY TO THE LENDER, PLUS AN ATTORNEY’S COMMISSION EQUAL TO
TEN PERCENT (10%) OF THE SUMS THEN OUTSTANDING UNDER THIS NOTE OR THE PURCHASE
AGREEMENT, BUT IN NO EVENT LESS THAN $25,000, WITH COSTS OF SUIT, RELEASE OF
PROCEDURAL ERRORS, OTHER THAN NOTICES THAT MAY BE REQUIRED HEREUNDER, AND
WITHOUT RIGHT OF APPEAL. IF A COPY OF THIS NOTE AND/OR THE PURCHASE AGREEMENT,
VERIFIED BY AN AFFIDAVIT, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE
NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. THE COMPANY WAIVES THE
RIGHT TO ANY STAY OF EXECUTION, THE BENEFIT OF ALL EXEMPTION LAWS NOW OR
HEREAFTER IN EFFECT AND ANY AND ALL RIGHTS TO PRIOR NOTICE AND

(5)

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

 

HEARING WITH RESPECT TO THE GARNISHMENT OR ATTACHMENT OF ANY PROPERTY PURSUANT
TO A JUDGMENT ENTERED HEREUNDER. NO SINGLE EXERCISE OF THE FOREGOING WARRANT AND
POWER TO BRING ANY ACTION OR CONFESS JUDGMENT THEREIN SHALL BE DEEMED TO EXHAUST
THE POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE EXERCISED FROM
TIME TO TIME AS OFTEN AS THE LENDER SHALL ELECT UNTIL ALL AMOUNTS PAYABLE TO THE
LENDER HEREUNDER, SHALL HAVE BEEN PAID IN FULL. THE EXERCISE BY THE LENDER OF
HIS RIGHTS AND REMEDIES AND THE ENTRY OF ANY JUDGMENT BY THE LENDER UNDER THIS
SECTION SHALL NOT AFFECT IN ANY WAY THE INTEREST RATE PAYABLE HEREUNDER OR ANY
OTHER AMOUNTS DUE TO THE LENDER, BUT INTEREST SHALL CONTINUE TO ACCRUE ON SUCH
AMOUNTS AT THE DEFAULT RATE.
THIS NOTE WAS ISSUED WITH “ORIGINAL ISSUE DISCOUNT.” FOR INFORMATION REGARDING
THE ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE, AND THE
YIELD TO MATURITY, HOLDERS SHOULD CONTACT ENVIRONMENTAL TECTONICS CORP.,
ATTENTION: CHIEF FINANCIAL OFFICER, 125 JAMES WAY, SOUTHAMPTON, PENNSYLVANIA
18966-3877, TELEPHONE NUMBER: (215) 355-9100.
* * *

(6)

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

 

     IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
name by its duly authorized officer as of the day and year first above written.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:        

(7)

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EXHIBIT B-1
FORM OF INITIAL STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR PURSUANT TO AN
EXEMPTION THEREFROM.

                          , 2009   Warrant to Purchase     Shares of Common
Stock

ENVIRONMENTAL TECTONICS CORPORATION
STOCK PURCHASE WARRANT
     THIS CERTIFIES THAT, for value received, H.F. Lenfest, or his registered
assigns (each, a “Holder”), is entitled to purchase from Environmental Tectonics
Corporation, a Pennsylvania corporation (the “Company”), at any time or from
time to time during the Exercise Period (as hereinafter defined), the number of
fully paid and nonassessable shares of the Company’s common stock, par value
$0.05 per share (the “Common Stock”), set forth in Section 1 hereof, at the
exercise price set forth in Section 2 hereof, subject to adjustment as provided
herein. The term “Warrant Shares”, as used herein, refers to the shares of
Common Stock purchasable hereunder. This Stock Purchase Warrant (this “Warrant”)
has been issued pursuant to, and subject to the terms of, that certain Secured
Credit Facility and Warrant Purchase Agreement, dated as of April 24, 2009, by
and between the Company and H.F. Lenfest (the “Purchase Agreement”). The term
“Warrants” means this Warrant and any warrants issued as a result of the
transfer, exchange or replacement of such warrants. Capitalized terms not
otherwise defined herein shall have the meanings given to such terms in the
Purchase Agreement.
     This Warrant is subject to the following terms, provisions and conditions:
     1. Number of Shares. During the Exercise Period, the Holder shall be
entitled to purchase                      shares of Common Stock under this
Warrant, which number of shares of Common Stock was determined by multiplying
the principal amount of the applicable Note to which this Warrant relates by 10%
and dividing that number by the Market Price (as hereinafter defined) as of the
Issue Date (as hereinafter defined); provided, however, that if the Shareholder
Approval is not obtained by the Shareholder Approval Date, the Holder shall be
entitled to purchase                      shares of Common Stock, which number
of shares was determined by multiplying the principal amount of the applicable
Note to which this Warrant relates by 50% and dividing by the Market Price as of
the Issue Date for the Company’s Common Stock for which this Note and this
Warrant relate.
     2. Exercise Price. The exercise price of this Warrant (the “Exercise
Price”) shall be a price per share equal to $          , which is the Market
Price as of the Issue Date; provided,

 

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

 

however, that if the Shareholder Approval is not obtained by the Shareholder
Approval Date, the Exercise Price shall be $          , which is 50% of the
foregoing Market Price.
     3. Period of Exercise. This Warrant is exercisable at any time or from time
to time beginning on the date of issuance (the “Issue Date”) and ending at 5:00
p.m., Philadelphia, Pennsylvania time on the seventh (7th) anniversary of the
Issue Date (the “Exercise Period”).
     4. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the “Exercise
Agreement”), to the Company during normal business hours on any business day at
the Company’s principal executive offices (or such other office or agency of the
Company as it may designate by notice to the Holder hereof), and upon payment to
the Company in cash, by certified or official bank check or by wire transfer for
the account of the Company of the Exercise Price for the Warrant Shares
specified in the Exercise Agreement. The Warrant Shares so purchased shall be
deemed to be issued to the Holder hereof or such Holder’s designee, as the
record owner of such shares, as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement shall
have been delivered and payment shall have been made for such shares as set
forth above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within fifteen (15) business days after this
Warrant shall have been so exercised. The certificates so delivered shall be in
such denominations as may be requested by the Holder hereof and shall be
registered in the name of such Holder or such other name as shall be designated
by such Holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, as soon as
practicable after the date of exercise, deliver to the Holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised.
     5. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
          (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
          (b) Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant.
          (c) Listing. The Company shall use its reasonable best efforts to
secure the listing of the Warrant Shares upon each securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall use its reasonable best efforts to maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all Warrant Shares.
          (d) Certain Actions Prohibited. The Company will not, by amendment of
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution,

2

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

 

issue or sale of securities, or any other voluntary action, directly or
indirectly, by operation of law or otherwise, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed by it
hereunder, but will at all times in good faith assist in the carrying out of all
the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the Holder of this Warrant in order to protect the
exercise privilege of the Holder of this Warrant against dilution or other
impairment, consistent with the tenor and purpose of this Warrant.
          (e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company or its assets.
     6. Antidilution Provisions. During the Exercise Period, the Exercise Price
and the number of Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 6. In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such Exercise
Price shall be rounded off to the nearest cent.
          (a) Sale of Securities Below Current Exercise Price. Except as
otherwise provided in Sections 6(b) and 6(d), if at any time the Company shall
issue or, pursuant to the provisions hereof, be deemed to have issued (other
than as set forth in Section 6(a)(vi) hereof) any shares of Common Stock,
Convertible Securities (as hereinafter defined), Rights (as hereinafter defined)
or Related Rights (as hereinafter defined) (collectively, “Securities”) without
consideration or for a consideration per share less than the Exercise Price in
effect immediately prior to the issuance of such Securities, then the Exercise
Price in effect immediately prior to each such issuance shall forthwith be
reduced to a price determined in accordance with the following formula:
EP2 = EP1 * (A + B) ÷ (A + C).
     For purposes of the foregoing formula, the following definitions shall
apply:
                    (a) “EP2” shall mean the Exercise Price for the Common Stock
in effect immediately after such issuance of Securities;
                    (b) “EP1” shall mean the Exercise Price of the Common Stock
in effect immediately prior to such issuance of Securities;
                    (c) “A” shall mean the number of shares of Common Stock
actually outstanding immediately prior to such issuance of Securities (excluding
shares of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
                    (d) “B” shall mean the number of additional shares of Common
Stock that would have been issued if such Securities had been issued at a price
per share equal to EP1 (determined by dividing the aggregate consideration
received by the Company in respect of such issue by EP1); and
                    (e) “C” shall mean the number of such Securities issued in
such transaction.

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For the purpose of this Section 6(a), the following definitions, procedures and
exceptions shall be applicable:
          (i) Rights. In the case of the issuance of options, warrants or other
rights to purchase or otherwise acquire shares of Common Stock, whether or not
at the time exercisable (collectively, “Rights”), the total number of shares of
Common Stock issuable upon exercise of such Rights shall be deemed to have been
issued at the time such Rights are issued, for a consideration equal to the sum
of the consideration, if any, received by the Company upon the issuance of such
Rights and the minimum purchase or exercise price payable upon the exercise of
such Rights for the Common Stock to be issued upon the exercise thereof; and the
consideration per share shall be determined by dividing (i) the aggregate
consideration so received by and payable to the Company, by (ii) the number of
shares of Common Stock issuable upon exercise of such Rights.
          (ii) Convertible Securities and Related Rights. In the case of the
issuance of any class or series of stock or any bonds, debentures, notes or
other securities or obligations convertible into or exchangeable for Common
Stock, whether or not then convertible or exchangeable (collectively,
“Convertible Securities”), or options, warrants or other rights to purchase or
otherwise acquire Convertible Securities (collectively, “Related Rights”), the
total number of shares of Common Stock issuable upon the conversion or exchange
of such Convertible Securities or exercise of such Related Rights shall be
deemed to have been issued at the time such Convertible Securities or Related
Rights are issued, for a consideration equal to the sum of (A) the
consideration, if any, received by the Company upon issuance of such Convertible
Securities or Related Rights (excluding any cash received on account of accrued
interest or dividends) and (B)(1) in the case of Convertible Securities, the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of such Convertible Securities or (2) in the case of
Related Rights, the sum of (x) the minimum purchase or exercise price payable
upon the exercise of such Related Rights for Convertible Securities and (y) the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of the Convertible Securities issued upon the exercise of
such Related Rights; and the consideration per share shall be determined by
dividing (i) the aggregate consideration so received by and payable to the
Company, by (ii) the number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities or exercise of such Related Rights.
          (iii) Changes. On any change in the number of shares of Common Stock
issuable upon the exercise of Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change in the minimum purchase or
exercise price of Rights, Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the anti-dilution provisions of such
Rights, Related Rights or Convertible Securities, the Exercise Price to the
extent in any way affected by such Rights, Related Rights or Convertible
Securities shall forthwith be readjusted to be thereafter the Exercise Price
that would have been obtained had the adjustment which was made upon the
issuance of such Rights, Related Rights or Convertible Securities been made
after giving effect to such change. No further adjustment shall be made in
respect of such change upon the actual issuance of Common Stock or any payment
of

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consideration upon the exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible Securities.
          (iv) Expiration or Cancellation. On the expiration or cancellation of
any such Rights, Related Rights or Convertible Securities, if the Exercise Price
shall have been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained had
the adjustment made upon the issuance of such Rights, Related Rights or
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or exchange of such Convertible
Securities.
          (v) Cash. In the case of the issuance of such Securities for cash, the
amount of consideration received by the Company shall be deemed to be the amount
of cash paid therefor before deducting any reasonable discounts, commissions or
other expenses paid or incurred by the Company for any underwriting or otherwise
in connection with the issuance and sale thereof. In the case of the issuance of
such Securities for consideration other than cash, the amount of consideration
received by the Company shall be determined in good faith by the Company’s Board
of Directors.
          (vi) Exceptions to Adjustment of Exercise Price. No adjustment to the
Exercise Price will be made (i) upon the exercise of any warrants, options or
convertible securities issued and outstanding on the Issue Date that are set
forth on Schedule 5.1(f) of the Purchase Agreement in accordance with the terms
of such securities as of such date; (ii) upon exercise of any stock or options
which may hereafter be exercised under any employee benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
the Warrants issued or issuable in accordance with the terms of the Purchase
Agreement; (iv) upon exercise of the Warrants; (v) upon the issuance of any
shares of Series E Preferred Stock in exchange for existing series of Preferred
Stock of the Company as provided in the Purchase Agreement or the issuance of
Common Stock in conversion thereof; (vi) upon the issuance of any shares of
Series D Preferred Stock in payment of fees and/or interest on the Notes as
provided in the Purchase Agreement or the issuance of Common Stock in conversion
thereof; or (vi) upon the issuance of securities in connection with a strategic
transaction that is approved by the Board of Directors of the Company, including
the Holder if then a director.
          (b) Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.

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          (c) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
          (d) Consolidation, Merger or Sale. In case of any consolidation of the
Company with, or merger of the Company into any other company, or in case of any
sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company,
then as a condition of such consolidation, merger or sale or conveyance,
adequate provision will be made whereby the Holder of this Warrant will have the
right to acquire and receive upon exercise of this Warrant in lieu of the shares
of Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as the Holders of the
Warrants would have received had the Warrants been exercised immediately prior
to such consolidation, merger or sale or conveyance. In any such case, the
Company will make appropriate provision to insure that the provisions of this
Section 6 hereof will thereafter be applicable as nearly as may be in relation
to any shares of stock or securities thereafter deliverable upon the exercise of
this Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor or acquiring
entity (if other than the Company) and, if an entity different from the
successor or acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock of the Company are entitled to receive as a result
of such consolidation, merger or sale or conveyance assumes by written
instrument the obligations of the Company under this Warrant (including under
this Section 6) and the obligations to deliver to the Holder of this Warrant
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to acquire. This Section 6(d) shall apply
to any successive consolidations, mergers, sales or conveyances.
          (e) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the Holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the Holder had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
          (f) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the Holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
          (g) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried

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forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall amount
to not less than 1% of such Exercise Price.
          (h) No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
          (i) Other Notices. In case at any time:
          (i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
          (ii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all, substantially all or a material portion of its
assets to, another Company or entity; or
          (iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend or distribution or for determining the holders of Common Stock
entitled to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, notice of the date (or, if not
then known, a reasonable approximation thereof by the Company) when the same
shall take place. Such notice shall also specify the date on which the holders
of Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least ten (10) business days prior to
the record date or the date on which the Company’s books are closed in respect
thereto. Failure to give any such notice or any defect therein shall not affect
the validity of the proceedings referred to in clauses (i), (ii) and
(iii) above; provided that if notice is not given in accordance with this
Section 4(i), the Company will use its best efforts to insure that the Holder of
this Warrant shall nevertheless receive the same rights and benefits received by
other holders of securities of the Company from the proceedings referred to in
clauses (i), (ii) and (iii) above, unless the Holder of this Warrant chooses not
to receive such rights and benefits.
          (j) Certain Events. If any event occurs of the type contemplated by
the adjustment provisions of this Section 6 but not expressly provided for by
such provisions, the Company will give notice of such event as provided in
Section 6(i) hereof, and the Company’s Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of

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shares of Common Stock acquirable upon exercise of this Warrant so that the
rights of the Holder shall be neither enhanced nor diminished by such event.
          (k) Definition of Market Price. “Market Price,” as of any date,
(i) means the closing sale price for the shares of Common Stock as reported on
the American Stock Exchange (“AMEX”) by Bloomberg Financial Markets
(“Bloomberg”) for the trading day immediately preceding such date, or (ii) if
the AMEX is not the principal trading market for the shares of Common Stock, the
average of the reported closing sale prices reported by Bloomberg on the
principal trading market for the Common Stock during the one hundred twenty
(120) day period immediately preceding such date, (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Market Price
shall be determined in good faith by the Board of Directors.
     7. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof.
     8. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder hereof to any voting rights, rights to dividends, or other
rights as a shareholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder hereof to purchase Warrant Shares,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
     9. Transfer, Exchange and Replacement of Warrant.
          (a) Restriction on Transfer. This Warrant and the rights granted to
the Holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 9(e)
below; provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 9(f). Notwithstanding the foregoing, this
Warrant, the shares of Common Stock issuable upon exercise hereof, and the
rights granted hereunder may not be transferred to a competitor of the Company
or any Subsidiary or affiliate of the Company.
          (b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the Holder hereof at the office or
agency of the Company referred to in Section 9(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the Holder hereof at the time of such surrender.
          (c) Replacement of Warrant. Upon receipt of evidence of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft, or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.

8

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          (d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange or replacement as provided in
this Section 9, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 9.
          (e) Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
          (f) Exercise or Transfer Without Registration. If, at the time of the
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such exercise, transfer, or exchange, that the Holder or
transferee of this Warrant, as the case may be, furnish to the Company a written
opinion of counsel to the effect that such exercise, transfer, or exchange may
be made without registration under the Securities Act and under applicable state
securities or blue sky laws; provided however, that no legal opinion shall be
required in connection with a transfer pursuant to Rule 144 under the Securities
Act unless in the opinion of counsel to the Company, such transfer does not
comply with the provisions of Rule 144. Notwithstanding the foregoing, the
initial Holder of this Warrant, by taking and holding the same, represents to
the Company that such Holder is acquiring this Warrant for investment and not
with a present view to the distribution thereof.
     10. Notices. Any notice which is required or provided to be given under
this Warrant shall be deemed to have been sufficiently given and received for
all purposes when delivered by hand, telecopy (if a copy of such confirmed
telecopy transmission shall be contemporaneously sent by first class mail), or
nationally recognized overnight courier, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, to the following addresses:
     If to the Company:
Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966
Attention: Chief Financial Officer
Facsimile: (215) 357-4000

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     With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: William Matthews, Esquire
Facsimile: (215) 568-6603
     If to a Holder hereof, at the address shown for such Holder on the books of
the Company; or, with respect to any party hereto, at any other address
designated in writing by such party in accordance with the provisions of this
Section 10.
     11. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in the Commonwealth of
Pennsylvania (without regard to principles of conflict of laws). The Company and
the Holder hereof consent to the jurisdiction of the United States federal
courts and the state courts located in the Commonwealth of Pennsylvania with
respect to any suit or proceeding based on or arising under this Warrant or the
transactions contemplated hereby and agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and the Holder
hereof waive the defense of an inconvenient forum to the maintenance of such
suit or proceeding and agree that service of process upon a party mailed by
first class mail shall be deemed in every respect effective service of process
upon the party in any such suit or proceeding. Nothing herein shall affect
either party’s right to serve process in any other manner permitted by law.
     12. Miscellaneous.
          (a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and a majority in
interest of the outstanding Warrants.
          (b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title: 
        Dated as of                     , 2009 

 

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FORM OF EXERCISE AGREEMENT
Dated:                           , 20     

To:   [Company]
[Address]

     The undersigned, pursuant to the provisions set forth in the Warrant
attached hereto, hereby agrees to purchase                      shares of Common
Stock covered by such Warrant, and makes payment herewith in full therefor at
the price per share provided by such Warrant in cash, by wire transfer or by
certified or official bank check in the amount of $                    . Please
issue a certificate or certificates for such shares of Common Stock in the name
of and pay any cash for any fractional share to:

                  Name:        
Signature:         Address:                   
Note:    The above signature should correspond exactly with the name on the face
of the within Warrant. 
 

and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.

 

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FORM OF ASSIGNMENT
     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:

          Name of Assignee   Address   No. of Shares
 
       

, and hereby irrevocably constitutes and appoints
                                                             as agent and
attorney-in-fact to transfer said Warrant on the books of the within-named
Company, with full power of substitution in the premises.
Dated:                           , 20     
In the presence of:
 

                  Name:        
Signature:        
Title of Signing Officer or Agent (if any):              Address:               
   
Note:    The above signature should correspond exactly with the name on the face
of the within Warrant. 
 

 

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EXHIBIT B-2
FORM OF ADDITIONAL STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR PURSUANT TO AN
EXEMPTION THEREFROM.

                                , 2009   Warrant to Purchase     Shares of
Common Stock

ENVIRONMENTAL TECTONICS CORPORATION
STOCK PURCHASE WARRANT
     THIS CERTIFIES THAT, for value received, H.F. Lenfest, or his registered
assigns (each, a “Holder”), is entitled to purchase from Environmental Tectonics
Corporation, a Pennsylvania corporation (the “Company”), at any time or from
time to time during the Exercise Period (as hereinafter defined), the number of
fully paid and nonassessable shares of the Company’s common stock, par value
$0.05 per share (the “Common Stock”), set forth in Section 1 hereof, at the
exercise price set forth in Section 2 hereof, subject to adjustment as provided
herein. The term “Warrant Shares”, as used herein, refers to the shares of
Common Stock purchasable hereunder. This Warrant has been issued pursuant to,
and subject to the terms of, that certain Secured Credit Facility and Warrant
Purchase Agreement, dated as of April 24, 2009, by and between the Company and
H.F. Lenfest (the “Purchase Agreement”). The term “Warrants” means this Warrant
and any warrants issued as a result of the transfer, exchange or replacement of
such warrants. Capitalized terms not otherwise defined herein shall have the
meanings given to such terms in the Purchase Agreement.
     This Warrant is subject to the following terms, provisions and conditions:
     1. Number of Shares. During the Exercise Period, the Holder shall be
entitled to purchase                      shares of Common Stock, which number
of shares of Common Stock was determined by multiplying the principal amount of
the applicable Note to which this Warrant relates by 10% and dividing that
number by the Market Price (as hereinafter defined) as of the Issue Date (as
hereinafter defined).
     2. Exercise Price. The exercise price (the “Exercise Price”) shall be a
price per share equal to $          , which is the Market Price as of the Issue
Date.
     3. Period of Exercise. This Warrant is exercisable at any time or from time
to time beginning on the date of issuance (the “Issue Date”) and ending at 5:00
p.m., Philadelphia, Pennsylvania time on the seventh (7th) anniversary of the
Issue Date (the “Exercise Period”).

 

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     4. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the “Exercise
Agreement”), to the Company during normal business hours on any business day at
the Company’s principal executive offices (or such other office or agency of the
Company as it may designate by notice to the Holder hereof), and upon payment to
the Company in cash, by certified or official bank check or by wire transfer for
the account of the Company of the Exercise Price for the Warrant Shares
specified in the Exercise Agreement. The Warrant Shares so purchased shall be
deemed to be issued to the Holder hereof or such Holder’s designee, as the
record owner of such shares, as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement shall
have been delivered and payment shall have been made for such shares as set
forth above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within fifteen (15) business days after this
Warrant shall have been so exercised. The certificates so delivered shall be in
such denominations as may be requested by the Holder hereof and shall be
registered in the name of such Holder or such other name as shall be designated
by such Holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, as soon as
practicable after the date of exercise, deliver to the Holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised.
     5. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
          (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
          (b) Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant.
          (c) Listing. The Company shall use its reasonable best efforts to
secure the listing of the Warrant Shares upon each securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall use its reasonable best efforts to maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all Warrant Shares.
          (d) Certain Actions Prohibited. The Company will not, by amendment of
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
directly or indirectly, by operation of law or otherwise, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed by
it hereunder, but will at all times in good faith assist in the carrying out of
all the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the Holder of this Warrant in order to protect the
exercise privilege of the Holder of

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this Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant.
          (e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company or its assets.
     6. Antidilution Provisions. During the Exercise Period, the Exercise Price
and the number of Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 6. In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such Exercise
Price shall be rounded off to the nearest cent.
          (a) Sale of Securities Below Current Exercise Price. Except as
otherwise provided in Sections 6(b) and 6(d), if at any time the Company shall
issue or, pursuant to the provisions hereof, be deemed to have issued (other
than as set forth in Section 6(a)(vi) hereof) any shares of Common Stock,
Convertible Securities (as hereinafter defined), Rights (as hereinafter defined)
or Related Rights (as hereinafter defined) (collectively, “Securities”) without
consideration or for a consideration per share less than the Exercise Price in
effect immediately prior to the issuance of such Securities, then the Exercise
Price in effect immediately prior to each such issuance shall forthwith be
reduced to a price determined in accordance with the following formula:
EP2 = EP1 * (A + B) ÷ (A + C).
     For purposes of the foregoing formula, the following definitions shall
apply:
                    (a) “EP2” shall mean the Exercise Price for the Common Stock
in effect immediately after such issuance of Securities;
                    (b) “EP1” shall mean the Exercise Price of the Common Stock
in effect immediately prior to such issuance of Securities;
                    (c) “A” shall mean the number of shares of Common Stock
actually outstanding immediately prior to such issuance of Securities (excluding
shares of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
                    (d) “B” shall mean the number of additional shares of Common
Stock that would have been issued if such Securities had been issued at a price
per share equal to EP1 (determined by dividing the aggregate consideration
received by the Company in respect of such issue by EP1); and
                    (e) “C” shall mean the number of such Securities issued in
such transaction.
For the purpose of this Section 6(a), the following definitions, procedures and
exceptions shall be applicable:

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          (i) Rights. In the case of the issuance of options, warrants or other
rights to purchase or otherwise acquire shares of Common Stock, whether or not
at the time exercisable (collectively, “Rights”), the total number of shares of
Common Stock issuable upon exercise of such Rights shall be deemed to have been
issued at the time such Rights are issued, for a consideration equal to the sum
of the consideration, if any, received by the Company upon the issuance of such
Rights and the minimum purchase or exercise price payable upon the exercise of
such Rights for the Common Stock to be issued upon the exercise thereof; and the
consideration per share shall be determined by dividing (i) the aggregate
consideration so received by and payable to the Company, by (ii) the number of
shares of Common Stock issuable upon exercise of such Rights.
          (ii) Convertible Securities and Related Rights. In the case of the
issuance of any class or series of stock or any bonds, debentures, notes or
other securities or obligations convertible into or exchangeable for Common
Stock, whether or not then convertible or exchangeable (collectively,
“Convertible Securities”), or options, warrants or other rights to purchase or
otherwise acquire Convertible Securities (collectively, “Related Rights”), the
total number of shares of Common Stock issuable upon the conversion or exchange
of such Convertible Securities or exercise of such Related Rights shall be
deemed to have been issued at the time such Convertible Securities or Related
Rights are issued, for a consideration equal to the sum of (A) the
consideration, if any, received by the Company upon issuance of such Convertible
Securities or Related Rights (excluding any cash received on account of accrued
interest or dividends) and (B)(1) in the case of Convertible Securities, the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of such Convertible Securities or (2) in the case of
Related Rights, the sum of (x) the minimum purchase or exercise price payable
upon the exercise of such Related Rights for Convertible Securities and (y) the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of the Convertible Securities issued upon the exercise of
such Related Rights; and the consideration per share shall be determined by
dividing (i) the aggregate consideration so received by and payable to the
Company, by (ii) the number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities or exercise of such Related Rights.
          (iii) Changes. On any change in the number of shares of Common Stock
issuable upon the exercise of Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change in the minimum purchase or
exercise price of Rights, Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the anti-dilution provisions of such
Rights, Related Rights or Convertible Securities, the Exercise Price to the
extent in any way affected by such Rights, Related Rights or Convertible
Securities shall forthwith be readjusted to be thereafter the Exercise Price
that would have been obtained had the adjustment which was made upon the
issuance of such Rights, Related Rights or Convertible Securities been made
after giving effect to such change. No further adjustment shall be made in
respect of such change upon the actual issuance of Common Stock or any payment
of consideration upon the exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible Securities.

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          (iv) Expiration or Cancellation. On the expiration or cancellation of
any such Rights, Related Rights or Convertible Securities, if the Exercise Price
shall have been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained had
the adjustment made upon the issuance of such Rights, Related Rights or
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or exchange of such Convertible
Securities.
          (v) Cash. In the case of the issuance of such Securities for cash, the
amount of consideration received by the Company shall be deemed to be the amount
of cash paid therefor before deducting any reasonable discounts, commissions or
other expenses paid or incurred by the Company for any underwriting or otherwise
in connection with the issuance and sale thereof. In the case of the issuance of
such Securities for consideration other than cash, the amount of consideration
received by the Company shall be determined in good faith by the Company’s Board
of Directors.
          (vi) Exceptions to Adjustment of Exercise Price. No adjustment to the
Exercise Price will be made (i) upon the exercise of any warrants, options or
convertible securities issued and outstanding on the Issue Date that are set
forth on Schedule 5.1(f) of the Purchase Agreement in accordance with the terms
of such securities as of such date; (ii) upon exercise of any stock or options
which may hereafter be exercised under any employee benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
the Warrants issued or issuable in accordance with the terms of the Purchase
Agreement; (iv) upon exercise of the Warrants; (v) upon the issuance of any
shares of Series E Preferred Stock in exchange for existing series of Preferred
Stock of the Company as provided in the Purchase Agreement or the issuance of
Common Stock in conversion thereof; (vi) upon the issuance of any shares of
Series D Preferred Stock in payment of fees and/or interest on the Notes as
provided in the Purchase Agreement or the issuance of Common Stock in conversion
thereof; or (vi) upon the issuance of securities in connection with a strategic
transaction that is approved by the Board of Directors of the Company, including
the Holder if then a director.
          (b) Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.

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          (c) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
          (d) Consolidation, Merger or Sale. In case of any consolidation of the
Company with, or merger of the Company into any other company, or in case of any
sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company,
then as a condition of such consolidation, merger or sale or conveyance,
adequate provision will be made whereby the Holder of this Warrant will have the
right to acquire and receive upon exercise of this Warrant in lieu of the shares
of Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as the Holders of the
Warrants would have received had the Warrants been exercised immediately prior
to such consolidation, merger or sale or conveyance. In any such case, the
Company will make appropriate provision to insure that the provisions of this
Section 6 hereof will thereafter be applicable as nearly as may be in relation
to any shares of stock or securities thereafter deliverable upon the exercise of
this Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor or acquiring
entity (if other than the Company) and, if an entity different from the
successor or acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock of the Company are entitled to receive as a result
of such consolidation, merger or sale or conveyance assumes by written
instrument the obligations of the Company under this Warrant (including under
this Section 6) and the obligations to deliver to the Holder of this Warrant
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to acquire. This Section 6(d) shall apply
to any successive consolidations, mergers, sales or conveyances.
          (e) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the Holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the Holder had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
          (f) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the Holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.

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          (g) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
          (h) No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
          (i) Other Notices. In case at any time:
          (i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
          (ii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all, substantially all or a material portion of its
assets to, another Company or entity; or
          (iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend or distribution or for determining the holders of Common Stock
entitled to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, notice of the date (or, if not
then known, a reasonable approximation thereof by the Company) when the same
shall take place. Such notice shall also specify the date on which the holders
of Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least ten (10) business days prior to
the record date or the date on which the Company’s books are closed in respect
thereto. Failure to give any such notice or any defect therein shall not affect
the validity of the proceedings referred to in clauses (i), (ii) and
(iii) above; provided that if notice is not given in accordance with this
Section 4(i), the Company will use its best efforts to insure that the Holder of
this Warrant shall nevertheless receive the same rights and benefits received by
other holders of securities of the Company from the proceedings referred to in
clauses (i), (ii) and (iii) above, unless the Holder of this Warrant chooses not
to receive such rights and benefits.

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     (j) Certain Events. If any event occurs of the type contemplated by the
adjustment provisions of this Section 6 but not expressly provided for by such
provisions, the Company will give notice of such event as provided in Section
6(i) hereof, and the Company’s Board of Directors will make an appropriate
adjustment in the Exercise Price and the number of shares of Common Stock
acquirable upon exercise of this Warrant so that the rights of the Holder shall
be neither enhanced nor diminished by such event.
     (k) Definition of Market Price. “Market Price,” as of any date, (i) means
the closing sale price for the shares of Common Stock as reported on the on the
NYSE AMEX LLC, the successor to the American Stock Exchange (“AMEX”), by
Bloomberg Financial Markets (“Bloomberg”) for the trading day immediately
preceding such date, or (ii) if the AMEX is not the principal trading market for
the shares of Common Stock, the average of the reported closing sale prices
reported by Bloomberg on the principal trading market for the Common Stock
during the one hundred twenty (120) day period immediately preceding such date,
(iii) if market value cannot be calculated as of such date on any of the
foregoing bases, the Market Price shall be determined in good faith by the Board
of Directors.
     7. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof.
     8. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder hereof to any voting rights, rights to dividends, or other
rights as a shareholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder hereof to purchase Warrant Shares,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
     9. Transfer, Exchange and Replacement of Warrant.
          (a) Restriction on Transfer. This Warrant and the rights granted to
the Holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 9(e)
below; provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 9(f). Notwithstanding the foregoing, this
Warrant, the shares of Common Stock issuable upon exercise hereof, and the
rights granted hereunder may not be transferred to a competitor of the Company
or any Subsidiary or affiliate of the Company.
          (b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the Holder hereof at the office or
agency of the Company referred to in Section 9(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the Holder hereof at the time of such surrender.

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          (c) Replacement of Warrant. Upon receipt of evidence of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft, or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
          (d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange or replacement as provided in
this Section 9, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 9.
          (e) Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
          (f) Exercise or Transfer Without Registration. If, at the time of the
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such exercise, transfer, or exchange, that the Holder or
transferee of this Warrant, as the case may be, furnish to the Company a written
opinion of counsel to the effect that such exercise, transfer, or exchange may
be made without registration under the Securities Act and under applicable state
securities or blue sky laws; provided however, that no legal opinion shall be
required in connection with a transfer pursuant to Rule 144 under the Securities
Act unless in the opinion of counsel to the Company, such transfer does not
comply with the provisions of Rule 144. Notwithstanding the foregoing, the
initial Holder of this Warrant, by taking and holding the same, represents to
the Company that such Holder is acquiring this Warrant for investment and not
with a present view to the distribution thereof.
     10. Notices. Any notice which is required or provided to be given under
this Warrant shall be deemed to have been sufficiently given and received for
all purposes when delivered by hand, telecopy (if a copy of such confirmed
telecopy transmission shall be contemporaneously sent by first class mail), or
nationally recognized overnight courier, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, to the following addresses:
     If to the Company:
Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966

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Attention: Chief Financial Officer
Facsimile: (215) 357-4000
     With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: William Matthews, Esquire
Facsimile: (215) 568-6603
     If to a Holder hereof, at the address shown for such Holder on the books of
the Company; or, with respect to any party hereto, at any other address
designated in writing by such party in accordance with the provisions of this
Section 10.
     11. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in the Commonwealth of
Pennsylvania (without regard to principles of conflict of laws). The Company and
the Holder hereof consent to the jurisdiction of the United States federal
courts and the state courts located in the Commonwealth of Pennsylvania with
respect to any suit or proceeding based on or arising under this Warrant or the
transactions contemplated hereby and agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and the Holder
hereof waive the defense of an inconvenient forum to the maintenance of such
suit or proceeding and agree that service of process upon a party mailed by
first class mail shall be deemed in every respect effective service of process
upon the party in any such suit or proceeding. Nothing herein shall affect
either party’s right to serve process in any other manner permitted by law.
     12. Miscellaneous.
          (a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and a majority in
interest of the outstanding Warrants.
          (b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title: 
        Dated as of                           , 2009 

 

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FORM OF EXERCISE AGREEMENT
Dated:                           , 20     

To:   [Company]
[Address]

     The undersigned, pursuant to the provisions set forth in the Warrant
attached hereto, hereby agrees to purchase            shares of Common Stock
covered by such Warrant, and makes payment herewith in full therefor at the
price per share provided by such Warrant in cash, by wire transfer or by
certified or official bank check in the amount of $                    . Please
issue a certificate or certificates for such shares of Common Stock in the name
of and pay any cash for any fractional share to:

                  Name:        
Signature:         Address:                   
Note:    The above signature should correspond exactly with the name on the face
of the within Warrant.
 

and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.

 

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FORM OF ASSIGNMENT
     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:

          Name of Assignee   Address   No. of Shares
 
       

, and hereby irrevocably constitutes and appoints
                                                             as agent and
attorney-in-fact to transfer said Warrant on the books of the within-named
Company, with full power of substitution in the premises.
Dated:                           , 20     
In the presence of:
 

                  Name:        
Signature:        
Title of Signing Officer or Agent (if any):              Address:               
   
Note:    The above signature should correspond exactly with the name on the face
of the within Warrant.
 

 

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EXHIBIT B-3
FORM OF GUARANTY WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR PURSUANT TO AN
EXEMPTION THEREFROM.

      _________ ___, 2009   Warrant to Purchase
Shares of Common Stock

ENVIRONMENTAL TECTONICS CORPORATION
STOCK PURCHASE WARRANT
     THIS CERTIFIES THAT, for value received, H.F. Lenfest, or his registered
assigns (each, a “Holder”), is entitled to purchase from Environmental Tectonics
Corporation, a Pennsylvania corporation (the “Company”), at any time or from
time to time during the Exercise Period (as hereinafter defined), the number of
fully paid and nonassessable shares of the Company’s common stock, par value
$0.05 per share (the “Common Stock”), set forth in Section 1 hereof, at the
exercise price set forth in Section 2 hereof, subject to adjustment as provided
herein. The term “Warrant Shares”, as used herein, refers to the shares of
Common Stock purchasable hereunder. This Warrant has been issued pursuant to,
and subject to the terms of, that certain Secured Credit Facility and Warrant
Purchase Agreement, dated as of April 24, 2009, by and between the Company and
H.F. Lenfest (the “Purchase Agreement”). The term “Warrants” means this Warrant
and any warrants issued as a result of the transfer, exchange or replacement of
such warrants. Capitalized terms not otherwise defined herein shall have the
meanings given to such terms in the Purchase Agreement.
     This Warrant is subject to the following terms, provisions and conditions:
     1. Number of Shares. During the Exercise Period, the Holder shall be
entitled to purchase _________ shares of Common Stock, which number of shares of
Common Stock was determined by dividing $500,000 by the Market Price (as
hereinafter defined) as of the Issue Date (as hereinafter defined).
     2. Exercise Price. The exercise price (the “Exercise Price”) shall be a
price per share equal to $______, which is the Market Price as of the Issue
Date.
     3. Period of Exercise. This Warrant is exercisable at any time or from time
to time beginning on the date of issuance (the “Issue Date”) and ending at 5:00
p.m., Philadelphia, Pennsylvania time on the seventh (7th) anniversary of the
Issue Date (the “Exercise Period”).

 

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     4. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the “Exercise
Agreement”), to the Company during normal business hours on any business day at
the Company’s principal executive offices (or such other office or agency of the
Company as it may designate by notice to the Holder hereof), and upon payment to
the Company in cash, by certified or official bank check or by wire transfer for
the account of the Company of the Exercise Price for the Warrant Shares
specified in the Exercise Agreement. The Warrant Shares so purchased shall be
deemed to be issued to the Holder hereof or such Holder’s designee, as the
record owner of such shares, as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement shall
have been delivered and payment shall have been made for such shares as set
forth above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within fifteen (15) business days after this
Warrant shall have been so exercised. The certificates so delivered shall be in
such denominations as may be requested by the Holder hereof and shall be
registered in the name of such Holder or such other name as shall be designated
by such Holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, as soon as
practicable after the date of exercise, deliver to the Holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised.
     5. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
          (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
          (b) Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant.
          (c) Listing. The Company shall use its reasonable best efforts to
secure the listing of the Warrant Shares upon each securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall use its reasonable best efforts to maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all Warrant Shares.
          (d) Certain Actions Prohibited. The Company will not, by amendment of
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
directly or indirectly, by operation of law or otherwise, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed by
it hereunder, but will at all times in good faith assist in the carrying out of
all the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the Holder of this Warrant in order to protect the
exercise privilege of the Holder of

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this Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant.
          (e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company or its assets.
     6. Antidilution Provisions. During the Exercise Period, the Exercise Price
and the number of Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 6. In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such Exercise
Price shall be rounded off to the nearest cent.
          (a) Sale of Securities Below Current Exercise Price. Except as
otherwise provided in Sections 6(b) and 6(d), if at any time the Company shall
issue or, pursuant to the provisions hereof, be deemed to have issued (other
than as set forth in Section 6(a)(vi) hereof) any shares of Common Stock,
Convertible Securities (as hereinafter defined), Rights (as hereinafter defined)
or Related Rights (as hereinafter defined) (collectively, “Securities”) without
consideration or for a consideration per share less than the Exercise Price in
effect immediately prior to the issuance of such Securities, then the Exercise
Price in effect immediately prior to each such issuance shall forthwith be
reduced to a price determined in accordance with the following formula:
EP2 = EP1 * (A + B) ÷ (A + C).
     For purposes of the foregoing formula, the following definitions shall
apply:
               (a) “EP2” shall mean the Exercise Price for the Common Stock in
effect immediately after such issuance of Securities;
               (b) “EP1” shall mean the Exercise Price of the Common Stock in
effect immediately prior to such issuance of Securities;
               (c) “A” shall mean the number of shares of Common Stock actually
outstanding immediately prior to such issuance of Securities (excluding shares
of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
               (d) “B” shall mean the number of additional shares of Common
Stock that would have been issued if such Securities had been issued at a price
per share equal to EP1 (determined by dividing the aggregate consideration
received by the Company in respect of such issue by EP1); and
               (e) “C” shall mean the number of such Securities issued in such
transaction.
For the purpose of this Section 6(a), the following definitions, procedures and
exceptions shall be applicable:

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          (i) Rights. In the case of the issuance of options, warrants or other
rights to purchase or otherwise acquire shares of Common Stock, whether or not
at the time exercisable (collectively, “Rights”), the total number of shares of
Common Stock issuable upon exercise of such Rights shall be deemed to have been
issued at the time such Rights are issued, for a consideration equal to the sum
of the consideration, if any, received by the Company upon the issuance of such
Rights and the minimum purchase or exercise price payable upon the exercise of
such Rights for the Common Stock to be issued upon the exercise thereof; and the
consideration per share shall be determined by dividing (i) the aggregate
consideration so received by and payable to the Company, by (ii) the number of
shares of Common Stock issuable upon exercise of such Rights.
          (ii) Convertible Securities and Related Rights. In the case of the
issuance of any class or series of stock or any bonds, debentures, notes or
other securities or obligations convertible into or exchangeable for Common
Stock, whether or not then convertible or exchangeable (collectively,
“Convertible Securities”), or options, warrants or other rights to purchase or
otherwise acquire Convertible Securities (collectively, “Related Rights”), the
total number of shares of Common Stock issuable upon the conversion or exchange
of such Convertible Securities or exercise of such Related Rights shall be
deemed to have been issued at the time such Convertible Securities or Related
Rights are issued, for a consideration equal to the sum of (A) the
consideration, if any, received by the Company upon issuance of such Convertible
Securities or Related Rights (excluding any cash received on account of accrued
interest or dividends) and (B)(1) in the case of Convertible Securities, the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of such Convertible Securities or (2) in the case of
Related Rights, the sum of (x) the minimum purchase or exercise price payable
upon the exercise of such Related Rights for Convertible Securities and (y) the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of the Convertible Securities issued upon the exercise of
such Related Rights; and the consideration per share shall be determined by
dividing (i) the aggregate consideration so received by and payable to the
Company, by (ii) the number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities or exercise of such Related Rights.
          (iii) Changes. On any change in the number of shares of Common Stock
issuable upon the exercise of Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change in the minimum purchase or
exercise price of Rights, Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the anti-dilution provisions of such
Rights, Related Rights or Convertible Securities, the Exercise Price to the
extent in any way affected by such Rights, Related Rights or Convertible
Securities shall forthwith be readjusted to be thereafter the Exercise Price
that would have been obtained had the adjustment which was made upon the
issuance of such Rights, Related Rights or Convertible Securities been made
after giving effect to such change. No further adjustment shall be made in
respect of such change upon the actual issuance of Common Stock or any payment
of consideration upon the exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible Securities.

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          (iv) Expiration or Cancellation. On the expiration or cancellation of
any such Rights, Related Rights or Convertible Securities, if the Exercise Price
shall have been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained had
the adjustment made upon the issuance of such Rights, Related Rights or
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or exchange of such Convertible
Securities.
          (v) Cash. In the case of the issuance of such Securities for cash, the
amount of consideration received by the Company shall be deemed to be the amount
of cash paid therefor before deducting any reasonable discounts, commissions or
other expenses paid or incurred by the Company for any underwriting or otherwise
in connection with the issuance and sale thereof. In the case of the issuance of
such Securities for consideration other than cash, the amount of consideration
received by the Company shall be determined in good faith by the Company’s Board
of Directors.
          (vi) Exceptions to Adjustment of Exercise Price. No adjustment to the
Exercise Price will be made (i) upon the exercise of any warrants, options or
convertible securities issued and outstanding on the Issue Date that are set
forth on Schedule 5.1(f) of the Purchase Agreement in accordance with the terms
of such securities as of such date; (ii) upon exercise of any stock or options
which may hereafter be exercised under any employee benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
the Warrants issued or issuable in accordance with the terms of the Purchase
Agreement; (iv) upon exercise of the Warrants; (v) upon the issuance of any
shares of Series E Preferred Stock in exchange for existing series of Preferred
Stock of the Company as provided in the Purchase Agreement or the issuance of
Common Stock in conversion thereof; (vi) upon the issuance of any shares of
Series D Preferred Stock in payment of fees and/or interest on the Notes as
provided in the Purchase Agreement or the issuance of Common Stock in conversion
thereof; or (vi) upon the issuance of securities in connection with a strategic
transaction that is approved by the Board of Directors of the Company, including
the Holder if then a director.
          (b) Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.

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          (c) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
          (d) Consolidation, Merger or Sale. In case of any consolidation of the
Company with, or merger of the Company into any other company, or in case of any
sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company,
then as a condition of such consolidation, merger or sale or conveyance,
adequate provision will be made whereby the Holder of this Warrant will have the
right to acquire and receive upon exercise of this Warrant in lieu of the shares
of Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as the Holders of the
Warrants would have received had the Warrants been exercised immediately prior
to such consolidation, merger or sale or conveyance. In any such case, the
Company will make appropriate provision to insure that the provisions of this
Section 6 hereof will thereafter be applicable as nearly as may be in relation
to any shares of stock or securities thereafter deliverable upon the exercise of
this Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor or acquiring
entity (if other than the Company) and, if an entity different from the
successor or acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock of the Company are entitled to receive as a result
of such consolidation, merger or sale or conveyance assumes by written
instrument the obligations of the Company under this Warrant (including under
this Section 6) and the obligations to deliver to the Holder of this Warrant
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to acquire. This Section 6(d) shall apply
to any successive consolidations, mergers, sales or conveyances.
          (e) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the Holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the Holder had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
          (f) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the Holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.

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          (g) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
          (h) No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
          (i) Other Notices. In case at any time:
          (i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
          (ii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all, substantially all or a material portion of its
assets to, another Company or entity; or
          (iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend or distribution or for determining the holders of Common Stock
entitled to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, notice of the date (or, if not
then known, a reasonable approximation thereof by the Company) when the same
shall take place. Such notice shall also specify the date on which the holders
of Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least ten (10) business days prior to
the record date or the date on which the Company’s books are closed in respect
thereto. Failure to give any such notice or any defect therein shall not affect
the validity of the proceedings referred to in clauses (i), (ii) and
(iii) above; provided that if notice is not given in accordance with this
Section 4(i), the Company will use its best efforts to insure that the Holder of
this Warrant shall nevertheless receive the same rights and benefits received by
other holders of securities of the Company from the proceedings referred to in
clauses (i), (ii) and (iii) above, unless the Holder of this Warrant chooses not
to receive such rights and benefits.

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          (j) Certain Events. If any event occurs of the type contemplated by
the adjustment provisions of this Section 6 but not expressly provided for by
such provisions, the Company will give notice of such event as provided in
Section 6(i) hereof, and the Company’s Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of shares of Common
Stock acquirable upon exercise of this Warrant so that the rights of the Holder
shall be neither enhanced nor diminished by such event.
          (k) Definition of Market Price. “Market Price,” as of any date,
(i) means the closing sale price for the shares of Common Stock as reported on
the NYSE AMEX LLC, the successor to the American Stock Exchange (“AMEX”), by
Bloomberg Financial Markets (“Bloomberg”) for the trading day immediately
preceding such date, or (ii) if the AMEX is not the principal trading market for
the shares of Common Stock, the average of the reported closing sale prices
reported by Bloomberg on the principal trading market for the Common Stock
during the one hundred twenty (120) day period immediately preceding such date,
(iii) if market value cannot be calculated as of such date on any of the
foregoing bases, the Market Price shall be determined in good faith by the Board
of Directors.
     7. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof.
     8. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder hereof to any voting rights, rights to dividends, or other
rights as a shareholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder hereof to purchase Warrant Shares,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
     9. Transfer, Exchange and Replacement of Warrant.
          (a) Restriction on Transfer. This Warrant and the rights granted to
the Holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 9(e)
below; provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 9(f). Notwithstanding the foregoing, this
Warrant, the shares of Common Stock issuable upon exercise hereof, and the
rights granted hereunder may not be transferred to a competitor of the Company
or any Subsidiary or affiliate of the Company.
          (b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the Holder hereof at the office or
agency of the Company referred to in Section 9(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the Holder hereof at the time of such surrender.

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          (c) Replacement of Warrant. Upon receipt of evidence of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft, or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
          (d) Cancellation; Payment of Expenses. Upon the surrender of this
Warrant in connection with any transfer, exchange or replacement as provided in
this Section 9, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 9.
          (e) Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
          (f) Exercise or Transfer Without Registration. If, at the time of the
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such exercise, transfer, or exchange, that the Holder or
transferee of this Warrant, as the case may be, furnish to the Company a written
opinion of counsel to the effect that such exercise, transfer, or exchange may
be made without registration under the Securities Act and under applicable state
securities or blue sky laws; provided however, that no legal opinion shall be
required in connection with a transfer pursuant to Rule 144 under the Securities
Act unless in the opinion of counsel to the Company, such transfer does not
comply with the provisions of Rule 144. Notwithstanding the foregoing, the
initial Holder of this Warrant, by taking and holding the same, represents to
the Company that such Holder is acquiring this Warrant for investment and not
with a present view to the distribution thereof.
     10. Notices. Any notice which is required or provided to be given under
this Warrant shall be deemed to have been sufficiently given and received for
all purposes when delivered by hand, telecopy (if a copy of such confirmed
telecopy transmission shall be contemporaneously sent by first class mail), or
nationally recognized overnight courier, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, to the following addresses:

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If to the Company:
Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966
Attention: Chief Financial Officer
Facsimile: (215) 357-4000
With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: William Matthews, Esquire
Facsimile: (215) 568-6603
     If to a Holder hereof, at the address shown for such Holder on the books of
the Company; or, with respect to any party hereto, at any other address
designated in writing by such party in accordance with the provisions of this
Section 10.
     11. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in the Commonwealth of
Pennsylvania (without regard to principles of conflict of laws). The Company and
the Holder hereof consent to the jurisdiction of the United States federal
courts and the state courts located in the Commonwealth of Pennsylvania with
respect to any suit or proceeding based on or arising under this Warrant or the
transactions contemplated hereby and agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and the Holder
hereof waive the defense of an inconvenient forum to the maintenance of such
suit or proceeding and agree that service of process upon a party mailed by
first class mail shall be deemed in every respect effective service of process
upon the party in any such suit or proceeding. Nothing herein shall affect
either party’s right to serve process in any other manner permitted by law.
     12. Miscellaneous.
          (a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and a majority in
interest of the outstanding Warrants.
          (b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:  
        Dated as of _________ ___, 2009

 

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FORM OF EXERCISE AGREEMENT
Dated: ________ __, 20__

To:   [Company]
[Address]

     The undersigned, pursuant to the provisions set forth in the Warrant
attached hereto, hereby agrees to purchase ______ shares of Common Stock covered
by such Warrant, and makes payment herewith in full therefor at the price per
share provided by such Warrant in cash, by wire transfer or by certified or
official bank check in the amount of $_________. Please issue a certificate or
certificates for such shares of Common Stock in the name of and pay any cash for
any fractional share to:

                  Name:             

            Signature:          Address:             

  Note:   The above signature should correspond exactly
with the name on the face of the within Warrant.

and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.

 

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FORM OF ASSIGNMENT
     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:

          Name of Assignee   Address   No. of Shares          

, and hereby irrevocably constitutes and appoints
_____________________________________________ as agent and attorney-in-fact to
transfer said Warrant on the books of the within-named Company, with full power
of substitution in the premises.
Dated: __________ ___, 20___
In the presence of:
 

                  Name:             

            Signature:         
Title of Signing Officer or Agent (if any):

            Address:             

  Note:   The above signature should correspond exactly
with the name on the face of the within Warrant.

 

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Exhibit C
Statement With Respect to Shares
of
Series E Convertible Preferred Stock
of
Environmental Tectonics Corporation
Pursuant to Section 1522(b) of the
Business Corporation Law of the Commonwealth of Pennsylvania
 
     In compliance with the requirements of 15 Pa.C.S. § 1522(b) (relating to
statements with respect to shares), Environmental Tectonics Corporation, a
Pennsylvania corporation (the “Corporation”), desiring to state the designation
and voting rights, preferences, limitations, and special rights, if any, of a
class or series of its shares, hereby states that:
     FIRST: The name of the Corporation is Environmental Tectonics Corporation.
     SECOND: The resolution amending the Articles of Incorporation of the
Corporation under 15 Pa. C.S. § 1522(b) (relating to divisions and
determinations by the board), set forth in full, is as follows:
     WHEREAS, the Articles of Incorporation of the Corporation authorizes
Preferred Stock consisting of 1,000,000 shares issuable from time to time in one
or more series; and
     WHEREAS, the Board of Directors of the Corporation (or an authorized
committee thereof) is authorized, subject to limitations prescribed by law and
by the Articles of Incorporation to establish and fix the number of shares to be
included in any series of Preferred Stock and the par value, designation,
rights, preferences and limitations of the shares of such series; and
     WHEREAS, the Board of Directors, acting through its Audit Committee,
intends to establish a new series of Preferred Stock, called Series E
Convertible Preferred Stock.
     NOW, THEREFORE, BE IT RESOLVED, that pursuant to Article 6 of the
Corporation’s Articles of Incorporation, the designation, rights, preferences,
powers, restrictions and limitations applicable to the Series E Preferred Stock
be and hereby are set forth below:
     1. Designation. The designation of this series, which consists of 25,000
shares of Preferred Stock, $0.05 par value per share, is the Series E
Convertible Preferred Stock (the “Series E Preferred Stock”) and the stated
value shall be One Thousand U.S. Dollars ($1,000.00) per share (the “Stated
Value”).
     2. Certain Definitions. For purposes of this Statement With Respect to
Shares, the following terms shall have the following meanings:
          “Common Stock” means the common stock of the Corporation, $0.05 par
value per share.

 

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          “Conversion Date” means, for any Optional Conversion (as defined
below), the date specified in the notice of conversion in the form attached
hereto (the “Notice of Conversion”), so long as a copy of the Notice of
Conversion is faxed (or delivered by other means resulting in notice) to the
Corporation before 4:59 p.m., Philadelphia, Pennsylvania time, on the Conversion
Date indicated in the Notice of Conversion; provided, however, that if the
Notice of Conversion is not so faxed or otherwise delivered before such time,
then the Conversion Date shall be the date the Holder faxes or otherwise
delivers the Notice of Conversion to the Corporation.
          “Conversion Price” means, with respect to each share of Series E
Preferred Stock, $2.00, provided that such Conversion Price shall be subject to
adjustment as provided herein.
     3. Dividends.
          (a) Accruing Dividends. From and after the date any shares of Series E
Preferred Stock are issued, the holder of any issued and outstanding shares of
Series E Preferred Stock (each a “Holder” and collectively, the “Holders”) shall
be entitled to receive, out of funds legally available therefor, cumulative
dividends at a rate of ten percent (10%) per annum of the Stated Value on each
share of Series E Preferred Stock (the “Accruing Dividends”) in preference to
the holders of Common Stock or any other series of Preferred Stock issued by the
Corporation after the date hereof and pari passu to the holders of the Series D
Preferred Stock of the Corporation (the “Series D Preferred Stock”). The
Accruing Dividends shall accrue on each issued and outstanding share of Series E
Preferred Stock from the date such share was issued, from day to day, whether or
not earned or declared, and shall compound annually and be cumulative. The
Corporation shall only pay the Holder the Accruing Dividends upon a Liquidation
Event (as hereinafter defined) or when otherwise declared by the Board of
Directors of the Corporation.
          (b) The Corporation shall not declare, pay or set aside any dividends
on shares of any other class or series of capital stock of the Corporation
(other than dividends on shares of Common Stock payable in shares of Common
Stock) unless (in addition to the obtaining of any consents required elsewhere
in the Articles of Incorporation) the holders of the Series E Preferred Stock
then outstanding shall first receive a dividend on each outstanding share of
Series E Preferred Stock in an amount at least equal to the amount of the
aggregate Accruing Dividends then accrued on such share of Series E Preferred
Stock and not previously paid.
          (c) The Holders shall be entitled to receive, if and when declared by
the Board of Directors and paid by the Corporation, any dividends paid with
respect to the Common Stock (other than any dividends paid in additional shares
of Common Stock). In the case of any such dividend, each Holder shall be
entitled to receive an amount per share of Series E Preferred Stock held by such
Holder as of the record date for such dividend equal to the product of: (i) the
amount of the dividend payable with respect to one share of Common Stock and
(ii) the number of shares of Common Stock that would be issued to a Holder if
one share of Series E Preferred Stock were converted by the Holder on the record
date.

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     4. Conversion.
          (a) Conversion at the Option of the Holder. Each Holder may, at any
time and from time to time, convert (an “Optional Conversion”) each of its
shares of Series E Preferred Stock plus all accrued but unpaid Accruing
Dividends into a number of fully paid and nonassessable shares of the Common
Stock determined by dividing the Stated Value plus the aggregate amount of the
Accruing Dividends by the Conversion Price for such shares of Series E Preferred
Stock.
          (b) Mechanics of Conversion. In order to effect an Optional
Conversion, a Holder shall: (x) fax (or otherwise deliver) a copy of the fully
executed Notice of Conversion to the Corporation or the transfer agent for the
Common Stock and (y) surrender or cause to be surrendered the original
certificates representing the Series E Preferred Stock being converted (the
“Series E Preferred Stock Certificates”), duly endorsed, along with a copy of
the Notice of Conversion as soon as practicable thereafter to the Corporation or
the transfer agent. Upon receipt by the Corporation of a facsimile copy of a
Notice of Conversion from a Holder, the Corporation shall promptly send, via
facsimile, a confirmation to such Holder stating that the Notice of Conversion
has been received, the date upon which the Corporation expects to deliver the
Common Stock issuable upon such conversion and the name and telephone number of
a contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock upon a conversion unless
either the Series E Preferred Stock Certificates are delivered to the
Corporation or the transfer agent as provided above, or the Holder notifies the
Corporation or the transfer agent that such Series E Preferred Stock
Certificates have been lost, stolen or destroyed and delivers the documentation
to the Corporation required by Section 10(b) hereof.
               (i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Series E Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation shall, no later than the later of (a) the third (3rd) business
day following the Conversion Date and (b) the (2nd) second business day
following the date of such surrender (or, in the case of lost, stolen or
destroyed certificates, after provision of indemnity pursuant to Section 10(b))
(the “Delivery Period”), issue and deliver to the Holder or its nominee (x) that
number of shares of Common Stock issuable upon conversion of such shares of
Series E Preferred Stock and Accruing Dividends being converted and (y) a
certificate representing the number of shares of Series E Preferred Stock not
being converted, if any. If the Corporation’s transfer agent is participating in
the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program,
and so long as the certificates therefor do not bear a legend and the Holder
thereof is not then required to return such certificate for the placement of a
legend thereon, the Corporation shall cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting
the account of the Holder or its nominee with DTC through its Deposit Withdrawal
Agent Commission system (“DTC Transfer”). If the aforementioned conditions to a
DTC Transfer are not satisfied, the Corporation shall deliver to the Holder
physical certificates representing the Common Stock issuable upon conversion.
Further, a Holder may instruct the Corporation to deliver to the Holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.

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               (ii) No Fractional Shares. If any conversion of Series E
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded, and the number of shares of
Common Stock issuable upon conversion of the Series E Preferred Stock shall be
rounded off to the nearest whole number of shares.
               (iii) Conversion Disputes. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph
(i) above. If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to an independent outside
accountant within two (2) business days of receipt of the Notice of Conversion.
The accountant, at the Corporation’s expense, shall review the calculations and
notify the Corporation and the Holder of the results. The accountant’s
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above no later than two (2) business days from the date it
receives the determination from the independent outside accountant.
     5. Rank. The Series E Preferred Stock shall rank (i) prior to the Common
Stock; (ii) prior to the Series B Preferred Stock; (iii) prior to the Series C
Preferred Stock; (iv) prior to any class or series of capital stock of the
Corporation hereafter created that does not, by its terms, rank senior to or
pari passu with the Series E Preferred Stock (collectively with the Common
Stock, the Series B Preferred Stock and the Series C Preferred Stock, “Junior
Securities”); (v) pari passu with the Series D Preferred Stock and any class or
series of capital stock of the Corporation hereafter created that, by its terms,
ranks on parity with the Series D Preferred Stock and Series E Preferred Stock
(the “Pari Passu Securities”); and (vi) junior to any class or series of capital
stock of the Corporation hereafter created that, by its terms, ranks senior to
the Series E Preferred Stock (collectively, the “Senior Securities”), in each
case as to distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary.
     6. Liquidation Preference.
          (a) If the Corporation shall commence a voluntary case under the U.S.
federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of ninety (90) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (a “Liquidation Event”), no distribution shall be made to the holders
of any shares of Junior Securities upon liquidation, dissolution or winding up
of the Corporation unless prior thereto the Holders shall have received the
Liquidation Preference (as defined below) with respect to each share of Series

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E Preferred Stock then outstanding. Any acquisition of the Corporation by means
of a merger or other form of corporate reorganization approved by the Board of
Directors of the Corporation in which all outstanding shares of Common Stock are
exchanged for securities or other consideration issued by the acquiring
corporation or its subsidiary or the effectuation by the Corporation of a
transaction or series of related transactions approved by the Board of Directors
of the Corporation in which more than 50% of the voting power is disposed of or
the sale, lease or other disposition of all or substantially all of the assets
of the Corporation, shall be deemed a Liquidation Event unless the holders of a
majority of the outstanding shares of Series E Preferred Stock elect to the
contrary; such election to be made by giving written notice thereof to the
Corporation at least three (3) days before the closing of such event. For
clarification, none of the transactions described in the preceding sentence
shall be deemed a Liquidation Event unless any such transaction is approved by
the Board of Directors of the Corporation. In such event, the Holders will be
entitled to receive in preference to the holders of Junior Securities, the
Liquidation Preference with respect to shares of Series E Preferred Stock in the
form of cash, securities or other property as is payable in connection with the
transaction deemed to be a Liquidation Event. In the event that the Corporation
sells, conveys or disposes of all or substantially all of its assets, the
Holders will be entitled to receive, prior to the holders of the Junior
Securities, if and when the Board of Directors declares a distribution of the
consideration received by the Corporation in such asset sale, the Liquidation
Preference with respect to the shares of Series E Preferred Stock. If, upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the Holders and holders of Pari Passu Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series E Preferred Stock and the Pari Passu
Securities, if any, shall be distributed ratably among such shares in proportion
to the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares. Following
payments of preferences to all holders of preferred stock of the Corporation,
all remaining assets and funds of the Corporation legally available for
distribution shall be distributed ratably to the holders of Common Stock,
Series E Preferred Stock (on an as-if converted to Common Stock basis) and any
other capital stock of the Corporation entitled to share in such distribution.
          (b) The “Liquidation Preference” with respect to a share of Series E
Preferred Stock means an amount equal to the Stated Value thereof plus any
accrued and unpaid dividends thereon, including the Accruing Dividends. The
Liquidation Preference with respect to any Pari Passu Securities shall be as set
forth in the Statement With Respect to Shares filed in respect thereof.
     7. Adjustments to the Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
          (a) Stock Splits, Stock Dividends, Etc. If, at any time on or after
the date hereof, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, combination, reclassification or other similar
event, the Conversion Price for each share of Series E Preferred Stock shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price for each share of Series E
Preferred Stock shall be proportionately increased.

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          (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time
after the date hereof, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged),
(iii) any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a “Corporate Change”), and, if such Corporate Change is
not a Liquidation Event pursuant to the terms of Section 6(a), then the Holders
shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable in such Corporate
Change with respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion had such Corporate Change not
taken place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the Holders of a majority of the Series E Preferred
Stock then outstanding) shall be made with respect to the rights and interests
of the Holders to the end that the economic value of the shares of Series E
Preferred Stock are in no way diminished by such Corporate Change and that the
provisions hereof (including, without limitation, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is not the Corporation, an immediate adjustment of the Conversion Price for each
share of Series E Preferred Stock so that the Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to the value
of the surviving entity’s common stock that existed between the Conversion Price
and the value of the Common Stock immediately prior to such Corporate Change).
          (c) Adjustment Due to New Issuances of Equity Securities Below the
Conversion Price.
               (i) Weighted Average Anti-Dilution Formula.
                    (A) If the Corporation issues, after the date hereof (the
“Effective Date”), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for the Series E
Preferred Stock in effect immediately prior to the issuance of such Additional
Stock, the Conversion Price for the Series E Preferred Stock in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this Section 7(c)(i)) be reduced to a price determined in accordance
with the following formula:
CP2 = CP1 * (A + B) ÷ (A + C).
          For purposes of the foregoing formula, the following definitions shall
apply:
          (1) “CP2” shall mean the Conversion Price for the Series E Preferred
Stock in effect immediately after such issue of Additional Stock

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          (2) “CP1” shall mean the Conversion Price of the Series E Preferred
Stock in effect immediately prior to such issue of Additional Stock;
          (3) “A” shall mean the number of shares of Common Stock actually
outstanding immediately prior to such issuance of Additional Stock (excluding
shares of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
          (4) “B” shall mean the number of additional shares of Common Stock
that would have been issued if such Additional Stock had been issued at a price
per share equal to CP1 (determined by dividing the aggregate consideration
received by the Corporation in respect of such issue by CP1); and
          (5) “C” shall mean the number of such Additional Stock issued in such
transaction.
                    (B) No adjustment of the Conversion Price for any series of
Series E Preferred Stock will be made in an amount less than one cent per share,
provided that any adjustments that are not required to be made by reason of this
sentence will be carried forward and shall be either taken into account in any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward, or will be made at the end
of three (3) years from the date of the event giving rise to the adjustment
being carried forward. Except to the limited extent provided for in
Sections 7(c)(i)(E)(3) and 7(c)(i)(E)(4), no adjustment of such Conversion Price
pursuant to this Section 7(c)(i) shall have the effect of increasing the
Conversion Price above the Conversion Price in effect immediately prior to such
adjustment.
                    (C) In the case of the issuance of Common Stock for cash,
the consideration will be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
                    (D) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash will be deemed to be the fair value thereof as determined in good faith by
the Board of Directors irrespective of any accounting treatment.
                    (E) In the case of the issuance (whether before, on or after
the Effective Date) of warrants, options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or warrants, options to purchase or rights to subscribe for such
convertible or exchangeable securities, the following provisions will apply for
all purposes of this Section 7(c)(i) and Section 7(c)(ii):
          (1) The aggregate maximum number of shares of Common Stock deliverable
upon exercise (to the extent then exercisable) of such warrants, options to
purchase or rights to subscribe for Common Stock will be deemed to have been
issued at the time such warrants, options or rights were issued and for a
consideration equal to the

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consideration (determined in the manner provided in Sections 7(c)(i)(C) and
7(c)(i)(D)), if any, received by the Corporation upon the issuance of such
warrants, options or rights plus the minimum exercise price provided in such
warrants, options or rights the Common Stock covered thereby.
          (2) The aggregate maximum number of shares of Common Stock deliverable
upon conversion of, or in exchange (to the extent then convertible or
exchangeable) assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time, for any
such convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof will be deemed to have been issued
at the time such securities were issued or such options or rights were issued
and for a consideration equal to the consideration, if any, received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
minimum additional consideration, if any, to be received by the Corporation upon
the conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the manner
provided in Sections 7(c)(i)(C) and 7(c)(i)(D)).
          (3) In the event of any change in the number of shares of Common Stock
deliverable or in the consideration payable to the Corporation upon exercise of
such options or rights or upon conversion of or in exchange for such convertible
or exchangeable securities, including, but not limited to, a change resulting
from the antidilution provisions thereof, the Conversion Price of the Series E
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities, will be recomputed to reflect such change, but no
further adjustment will be made for the actual issuance of Common Stock or any
payment of such consideration upon the exercise of any such options or rights or
the conversion or exchange of such securities.
          (4) Upon the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any options or
rights related to such convertible or exchangeable securities, the Conversion
Price of the Series E Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, will be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
that remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
          (5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Sections 7(c)(i)(E)(1) and
7(c)(i)(E)(2) will be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 7(c)(i)(E)(3) or
7(c)(i)(E)(4).
               (ii) Definition of Additional Stock. “Additional Stock” means any
shares of Common Stock issued (or deemed to have been issued pursuant to
Section 7(c)(i)(E)) by the Corporation after the date hereof other than:

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                    (a) shares of Common Stock issued pursuant to a transaction
described in Section 7(a) hereof;
                    (b) shares of Common Stock issued or issuable to any
employee, officer, director, consultant or advisor of the Corporation for
services provided to the Corporation directly or pursuant to any employee
benefit plan which has been approved by the Board of Directors of the
Corporation, so long as the total number of shares of Common Stock so issued or
issuable (and not repurchased at cost by the Corporation in connection with the
termination of employment or other provision of services to the Corporation and
not subject to options that expire unexercised) does not exceed 1,366,890
shares;
                    (c) shares of Common Stock issued or issuable pursuant to a
bona fide firm commitment underwritten public offering with a nationally
recognized underwriter that generates gross proceeds in excess of $30,000,000
and that is approved by the Board of Directors of the Corporation, including the
Series E Director Nominee;
                    (d) shares of Common Stock issued pursuant to the
conversion, exchange or exercise of convertible or exercisable securities
outstanding as of the date hereof or subsequently issued pursuant to this
Section 7(c)(ii);
                    (e) shares of Common Stock issued or issuable in connection
with a bona fide business acquisition of or by the Corporation, whether by
merger, consolidation, sale of assets, sale or exchange of stock or otherwise
that is approved by the Board of Directors of the Corporation, including the
Series E Director Nominee;
                    (f) shares of Common Stock issuable upon conversion of any
shares of Series E Preferred Stock;
                    (g) shares of Common Stock issuable upon conversion of any
shares of any sub-series of Series D Preferred Stock issued in payment of fees
or interest under that certain Secured Credit Facility and Warrant Purchase
Agreement dated as of April ___, 2009, by and between the Corporation and H.F.
Lenfest (the “Purchase Agreement”);
                    (h) shares of Common Stock issuable upon exercise of those
certain warrants to purchase common stock issued or issuable in connection with
the transactions contemplated by the Purchase Agreement; or
                    (i) shares of Common Stock issued pursuant to a transaction
in which the Conversion Price adjustments set forth in this Section 7(c) are
waived by the holders of at least a majority of the then outstanding shares of
Series E Preferred Stock.
          (d) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Section 7, the Corporation
shall promptly compute such adjustment or readjustment and prepare and furnish
to each Holder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.

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     8. Voting Rights.
          (a) General. The Holders shall be entitled to vote with the holders of
Common Stock, voting together as one class, on all matters submitted to a vote
of the holders of Common Stock, and each share of Series E Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which each such share is convertible as of the record date for the
applicable vote. To the extent that under the Pennsylvania Business Corporation
Law the vote of the Holders, voting separately as a class or series, as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the Holders of at least a majority of the then
outstanding shares of the Series E Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the Holders of at
least a majority of the then outstanding shares of Series E Preferred Stock
shall constitute the approval of such action by the class.
          (b) Election of Directors. So long as any shares of Series E Preferred
Stock remain outstanding, the Board of Directors will consist of five
(5) members, one of which shall be the Chief Executive Officer, or similar
position, of the Corporation and one of which shall be nominated by the holders
of shares of Series E Preferred Stock, voting separately as a single class (the
“Series E Director Nominee”), which director may be removed from office, and any
vacancy caused by the resignation, death or removal of the Series E Director
Nominee shall be filled by the holders of a majority of the then outstanding
shares of Series E Preferred Stock.
     9. Protective Provisions. So long as any of the shares of Series E
Preferred Stock are outstanding, the Corporation shall not, without first
obtaining the approval (by vote or written consent) of the Holders of a majority
of the then outstanding shares of Series E Preferred Stock (i) amend the rights,
preferences or privileges of the Series E Preferred Stock set forth in this
Statement With Respect to Shares; (ii) create any new class or series of capital
stock that would constitute Senior Securities or Pari Passu Securities;
(iii) redeem, or declare or pay any dividend or other distribution on account
of, any shares of Common Stock or Junior Securities (other than pursuant to the
terms of any stock option plan for directors, officers, employees, advisors or
consultants approved by the Board of Directors); (iv) amend, alter or repeal any
provision of the Articles of Incorporation or Bylaws of the Corporation;
(v) effect any transaction that would be deemed a Liquidation Event (as defined
in Section 6(a)) or Corporate Change (as defined in Section 7(b) hereof);
(vi) authorize or enter into any transaction or series or related transactions
in which the holder or holders of capital stock of the Corporation immediately
prior to such transaction or series of transactions will hold, immediately after
such transaction or series of transactions, less than a majority of the
aggregate voting power of the outstanding capital stock of the surviving entity;
(vii) increase or decrease the authorized number of directors constituting the
Board of Directors; (viii) decrease the number of authorized shares of Preferred
Stock; (ix) redeem or offer to redeem any shares of Series E Preferred Stock;
(x) authorize or effect a transaction in which the Corporation would incur any
debt secured by the assets of the Corporation or amend its current secured debt
facility; or (xi) enter into any transaction, other than employment or
consulting agreements in the ordinary course of business on a basis consistent
with past practices, with any officer, director or beneficial owner of five
percent (5%) or more of the Common Stock or any affiliate of the foregoing.
Notwithstanding the foregoing, no consent or approval of the Holders will be
required for, and the Board of Directors is expressly authorized to provide for,
the issuance of shares of Preferred Stock if such series would constitute Junior
Securities, by filing a certificate pursuant to the applicable law of the

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Commonwealth of Pennsylvania, to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and any qualifications,
limitations or restrictions thereon.
     10. Miscellaneous.
          (a) Cancellation of Series E Preferred Stock. If any shares of
Series E Preferred Stock are converted pursuant to Section 4, the shares so
converted shall be canceled, shall return to the status of authorized, but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Corporation as Series E Preferred Stock.
          (b) Lost or Stolen Certificates. Upon receipt by the Corporation of
(i) evidence of the loss, theft, destruction or mutilation of any Series E
Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Corporation, or (z) in
the case of mutilation, upon surrender and cancellation of the Series E
Preferred Stock Certificate(s), the Corporation shall execute and deliver new
Series E Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Series E
Preferred Stock Certificate(s) if the Holder contemporaneously requests the
Corporation to convert such Series E Preferred Stock.
          (c) Status as Shareholder. Upon submission of a Notice of Conversion
by a Holder, (i) the shares covered thereby and any accrued and unpaid Accruing
Dividends thereon shall be deemed converted into shares of Common Stock and
(ii) the Holder’s rights as a holder of such converted shares of Series E
Preferred Stock shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies provided herein
or otherwise available at law or in equity to such Holder because of a failure
by the Corporation to comply with the terms of this Statement With Respect to
Shares.
     THIRD: With respect to the Series E Preferred Stock, the aggregate number
of shares of such class or series established and designated by (a) such
resolutions, (b) all prior statements, if any, filed under 15 Pa. C.S. § 1522 or
corresponding provisions of prior law with respect thereto, and (c) any other
provision of the Articles of Incorporation is 25,000 shares.
     FOURTH: The resolution was adopted by the Audit Committee of the Board of
Directors effective as of ______ ___, 2009.
     FIFTH: The resolution shall be effective upon the filing of this Statement
With Respect to Shares in the Department of State.
* * * * * *
[Signature Page Follows]

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     IN WITNESS WHEREOF, the undersigned has caused this Statement With Respect
to Shares to be signed by a duly authorized officer this ______ day of
_______________, 2009.

            ENVIRONMENTAL TECTONICS
CORPORATION, a Pennsylvania corporation
      By:           Name:           Title:        

 

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NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series E Preferred Stock)
The undersigned hereby irrevocably elects to convert _________ shares of
Series E Preferred Stock, represented by stock certificate No(s). _________ (the
“Series E Preferred Stock Certificates”), into shares of common stock (“Common
Stock”) of Environmental Tectonics Corporation (the “Corporation”) according to
the conditions of the Statement With Respect to Shares of Series E Convertible
Preferred Stock, as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of each
Series E Preferred Stock Certificate is attached hereto (or evidence of loss,
theft or destruction thereof).
[The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee (which is _________) with DTC through its Deposit Withdrawal Agent
Commission System (“DTC Transfer”).]
The undersigned acknowledges that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series E Preferred
Stock may only be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the “Act”), or pursuant to an exemption from
registration under the Act.

o   In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby requests
that the Corporation issue and deliver to the undersigned physical certificates
representing such shares of Common Stock.]

Date of Conversion: ______________________________
Conversion Price: ________________________________
Number of Shares of Common
Stock to be Issued: _______________________________
[Holder]

            By:           Name:           Title:      

            Addres:                             

 

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Exhibit D
Statement With Respect to Shares
of
Series D Convertible Preferred Stock
of
Environmental Tectonics Corporation
Pursuant to Section 1522(b) of the
Business Corporation Law of the Commonwealth of Pennsylvania
 
     In compliance with the requirements of 15 Pa.C.S. § 1522(b) (relating to
statements with respect to shares), Environmental Tectonics Corporation, a
Pennsylvania corporation (the “Corporation”), desiring to state the designation
and voting rights, preferences, limitations, and special rights, if any, of a
class or series of its shares, hereby states that:
     FIRST: The name of the Corporation is Environmental Tectonics Corporation.
     SECOND: The resolution amending the Articles of Incorporation of the
Corporation under 15 Pa. C.S. § 1522(b) (relating to divisions and
determinations by the board), set forth in full, is as follows:
     WHEREAS, the Articles of Incorporation of the Corporation authorizes
Preferred Stock consisting of 1,000,000 shares issuable from time to time in one
or more series; and
     WHEREAS, the Board of Directors of the Corporation (or an authorized
committee thereof) is authorized, subject to limitations prescribed by law and
by the Articles of Incorporation to establish and fix the number of shares to be
included in any series of Preferred Stock and the par value, designation,
rights, preferences and limitations of the shares of such series; and
     WHEREAS, the Board of Directors, acting through its Audit Committee,
intends to establish a new series of Preferred Stock, called Series D
Convertible Preferred Stock.
     NOW, THEREFORE, BE IT RESOLVED, that pursuant to Article 6 of the
Corporation’s Articles of Incorporation, the designation, rights, preferences,
powers, restrictions and limitations applicable to the Series D Preferred Stock
be and hereby are set forth below:
     1. Designation. The designation of this series, which consists of 11,000
shares of Preferred Stock, $0.05 par value per share, is the Series D
Convertible Preferred Stock (the “Series D Preferred Stock”) and the stated
value shall be One Thousand U.S. Dollars ($1,000.00) per share (the “Stated
Value”). The Series D Preferred Stock may be issued in one or more sub-series of
Series D Preferred Stock to be designated: Series D-1 Preferred Stock,
Series D-2 Preferred Stock, Series D-3 Preferred Stock, and so on and so forth,
the number of shares of each such series to be determined by resolution of the
Board of Directors of the Corporation, including the Series D Director Nominee
(as hereinafter defined). Each sub-series of Series D Preferred Stock shall have
all of the same rights, preferences and privileges as each other sub-series of
Series D Preferred Stock, except that the Conversion Price (as hereinafter

 

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defined) shall differ based on the Market Price (as hereinafter defined) on the
date of issuance of such sub-series of Series D Preferred Stock.
     2. Certain Definitions. For purposes of this Statement With Respect to
Shares, the following terms shall have the following meanings:
          “Common Stock” means the common stock of the Corporation, $0.05 par
value per share.
          “Conversion Date” means, for any Optional Conversion (as defined
below), the date specified in the notice of conversion in the form attached
hereto (the “Notice of Conversion”), so long as a copy of the Notice of
Conversion is faxed (or delivered by other means resulting in notice) to the
Corporation before 4:59 p.m., Philadelphia, Pennsylvania time, on the Conversion
Date indicated in the Notice of Conversion; provided, however, that if the
Notice of Conversion is not so faxed or otherwise delivered before such time,
then the Conversion Date shall be the date the Holder faxes or otherwise
delivers the Notice of Conversion to the Corporation.
          “Conversion Price” means, with respect to each share of Series D
Preferred Stock, the Market Price as of the date of issuance of such shares of
Series D Preferred Stock, provided that such Conversion Price shall be subject
to adjustment as provided herein.
          “Market Price” means, as of any date, (i) the closing sale price for
the shares of Common Stock as reported on NYSE AMEX LLC, the successor to the
American Stock Exchange (“AMEX”) by Bloomberg Financial Markets (“Bloomberg”)
for the trading day immediately preceding such date, or (ii) if AMEX is not the
principal trading market for the shares of Common Stock, the average of the
reported closing sale prices reported by Bloomberg on the principal trading
market for the Common Stock during the one hundred twenty (120) day period
immediately preceding such date, or (iii) if market value cannot be calculated
as of such date on any of the foregoing bases, the Market Price shall be
determined in good faith by the Board of Directors of the Corporation.
     3. Dividends.
          (a) Accruing Dividends. From and after the date a share of Series D
Preferred Stock is issued (the “Applicable Issue Date”), the holder of such
issued and outstanding share of Series D Preferred Stock (each a “Holder” and
collectively, the “Holders”) shall be entitled to receive, out of funds legally
available therefor, cumulative dividends at a rate of ten percent (10%) per
annum of the Stated Value on each such share of Series D Preferred Stock (the
“Accruing Dividends”) in preference to the holders of Common Stock or any other
series of Preferred Stock issued by the Corporation after the date hereof which
does not, by its terms, provide that it is senior to or pari passu with the
Series D Preferred Stock with respect to dividends. The Accruing Dividends shall
accrue on each issued and outstanding share of Series D Preferred Stock from the
Applicable Issue Date, from day to day, whether or not earned or declared, and
shall compound annually and be cumulative. The Corporation shall only pay the
Holder the Accruing Dividends upon a Liquidation Event (as hereinafter defined)
or when otherwise declared by the Board of Directors of the Corporation.

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          (b) The Corporation shall not declare, pay or set aside any dividends
on shares of any other class or series of capital stock of the Corporation
(other than dividends on shares of Common Stock payable in shares of Common
Stock) unless (in addition to the obtaining of any consents required elsewhere
in the Articles of Incorporation) the holders of the Series D Preferred Stock
then outstanding shall first receive a dividend on each outstanding share of
Series D Preferred Stock in an amount at least equal to the amount of the
aggregate Accruing Dividends then accrued on such share of Series D Preferred
Stock and not previously paid.
          (c) The Holders shall be entitled to receive, if and when declared by
the Board of Directors and paid by the Corporation, any dividends paid with
respect to the Common Stock (other than any dividends paid in additional shares
of Common Stock). In the case of any such dividend, each Holder shall be
entitled to receive an amount per share of Series D Preferred Stock held by such
Holder as of the record date for such dividend equal to the product of: (i) the
amount of the dividend payable with respect to one share of Common Stock and
(ii) the number of shares of Common Stock that would be issued to a Holder if
one share of Series D Preferred Stock were converted by the Holder on the record
date.
     4. Conversion.
          (a) Conversion at the Option of the Holder. Each Holder may, at any
time and from time to time, convert (an “Optional Conversion”) each of its
shares of Series D Preferred Stock plus all accrued but unpaid Accruing
Dividends into a number of fully paid and nonassessable shares of the Common
Stock determined by dividing the Stated Value plus the aggregate amount of the
Accruing Dividends by the Conversion Price for such shares of Series D Preferred
Stock.
          (b) Mechanics of Conversion. In order to effect an Optional
Conversion, a Holder shall: (x) fax (or otherwise deliver) a copy of the fully
executed Notice of Conversion to the Corporation or the transfer agent for the
Common Stock and (y) surrender or cause to be surrendered the original
certificates representing the Series D Preferred Stock being converted (the
“Series D Preferred Stock Certificates”), duly endorsed, along with a copy of
the Notice of Conversion as soon as practicable thereafter to the Corporation or
the transfer agent. Upon receipt by the Corporation of a facsimile copy of a
Notice of Conversion from a Holder, the Corporation shall promptly send, via
facsimile, a confirmation to such Holder stating that the Notice of Conversion
has been received, the date upon which the Corporation expects to deliver the
Common Stock issuable upon such conversion and the name and telephone number of
a contact person at the Corporation regarding the conversion. The Corporation
shall not be obligated to issue shares of Common Stock upon a conversion unless
either the Series D Preferred Stock Certificates are delivered to the
Corporation or the transfer agent as provided above, or the Holder notifies the
Corporation or the transfer agent that such Series D Preferred Stock
Certificates have been lost, stolen or destroyed and delivers the documentation
to the Corporation required by Section 10(b) hereof.
               (i) Delivery of Common Stock Upon Conversion. Upon the surrender
of Series D Preferred Stock Certificates accompanied by a Notice of Conversion,
the Corporation shall, no later than the later of (a) the third (3rd) business
day following the Conversion Date and (b) the (2nd) second business day
following the date of such surrender (or, in the case of lost,

3

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stolen or destroyed certificates, after provision of indemnity pursuant to
Section 10(b)) (the “Delivery Period”), issue and deliver to the Holder or its
nominee (x) that number of shares of Common Stock issuable upon conversion of
such shares of Series D Preferred Stock and Accruing Dividends being converted
and (y) a certificate representing the number of shares of Series D Preferred
Stock not being converted, if any. If the Corporation’s transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program, and so long as the certificates therefor do not bear a legend
and the Holder thereof is not then required to return such certificate for the
placement of a legend thereon, the Corporation shall cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the Holder
by crediting the account of the Holder or its nominee with DTC through its
Deposit Withdrawal Agent Commission system (“DTC Transfer”). If the
aforementioned conditions to a DTC Transfer are not satisfied, the Corporation
shall deliver to the Holder physical certificates representing the Common Stock
issuable upon conversion. Further, a Holder may instruct the Corporation to
deliver to the Holder physical certificates representing the Common Stock
issuable upon conversion in lieu of delivering such shares by way of DTC
Transfer.
               (ii) No Fractional Shares. If any conversion of Series D
Preferred Stock would result in the issuance of a fractional share of Common
Stock, such fractional share shall be disregarded, and the number of shares of
Common Stock issuable upon conversion of the Series D Preferred Stock shall be
rounded off to the nearest whole number of shares.
               (iii) Conversion Disputes. In the case of any dispute with
respect to a conversion, the Corporation shall promptly issue such number of
shares of Common Stock as are not disputed in accordance with subparagraph
(i) above. If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to an independent outside
accountant within two (2) business days of receipt of the Notice of Conversion.
The accountant, at the Corporation’s expense, shall review the calculations and
notify the Corporation and the Holder of the results. The accountant’s
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above no later than two (2) business days from the date it
receives the determination from the independent outside accountant.
     5. Rank. The Series D Preferred Stock shall rank (i) prior to the Common
Stock; (ii) prior to the Series B Preferred Stock; (iii) prior to the Series C
Preferred Stock; (iv) prior to any class or series of capital stock of the
Corporation hereafter created that does not, by its terms, rank senior to or
pari passu with the Series D Preferred Stock (collectively with the Common
Stock, the Series B Preferred Stock and the Series C Preferred Stock, “Junior
Securities”); (v) pari passu with any class or series of capital stock of the
Corporation hereafter created that, by its terms, ranks on parity with the
Series D Preferred Stock (the “Pari Passu Securities”); and (vi) junior to any
class or series of capital stock of the Corporation hereafter created that, by
its terms, ranks senior to the Series D Preferred Stock (collectively, the
“Senior Securities”), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.

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     6. Liquidation Preference.
          (a) If the Corporation shall commence a voluntary case under the U.S.
federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of ninety (90) consecutive
days and, on account of any such event, the Corporation shall liquidate,
dissolve or wind up, or if the Corporation shall otherwise liquidate, dissolve
or wind up (a “Liquidation Event”), no distribution shall be made to the holders
of any shares of Junior Securities upon liquidation, dissolution or winding up
of the Corporation unless prior thereto the Holders shall have received the
Liquidation Preference (as defined below) with respect to each share of Series D
Preferred Stock then outstanding. Any acquisition of the Corporation by means of
a merger or other form of corporate reorganization approved by the Board of
Directors of the Corporation in which all outstanding shares of Common Stock are
exchanged for securities or other consideration issued by the acquiring
corporation or its subsidiary or the effectuation by the Corporation of a
transaction or series of related transactions approved by the Board of Directors
of the Corporation in which more than 50% of the voting power is disposed of or
the sale, lease or other disposition of all or substantially all of the assets
of the Corporation, shall be deemed a Liquidation Event unless the holders of a
majority of the outstanding shares of Series D Preferred Stock elect to the
contrary; such election to be made by giving written notice thereof to the
Corporation at least three (3) days before the closing of such event. For
clarification, none of the transactions described in the preceding sentence
shall be deemed a Liquidation Event unless any such transaction is approved by
the Board of Directors of the Corporation. In such event, the Holders will be
entitled to receive in preference to the holders of Junior Securities, the
Liquidation Preference with respect to shares of Series D Preferred Stock in the
form of cash, securities or other property as is payable in connection with the
transaction deemed to be a Liquidation Event. In the event that the Corporation
sells, conveys or disposes of all or substantially all of its assets, the
Holders will be entitled to receive, prior to the holders of the Junior
Securities, if and when the Board of Directors declares a distribution of the
consideration received by the Corporation in such asset sale, the Liquidation
Preference with respect to the shares of Series D Preferred Stock. If, upon the
occurrence of a Liquidation Event, the assets and funds available for
distribution among the Holders and holders of Pari Passu Securities shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series D Preferred Stock and the Pari Passu
Securities, if any, shall be distributed ratably among such shares in proportion
to the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares. Following
payments of preferences to all holders of preferred stock of the Corporation,
all remaining assets and funds of the Corporation legally available for
distribution shall be distributed ratably to the

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holders of Common Stock, Series D Preferred Stock (on an as-if converted to
Common Stock basis) and any other capital stock of the Corporation entitled to
share in such distribution.
          (b) The “Liquidation Preference” with respect to a share of Series D
Preferred Stock means an amount equal to the Stated Value thereof plus any
accrued and unpaid dividends thereon, including the Accruing Dividends. The
Liquidation Preference with respect to any Pari Passu Securities shall be as set
forth in the Statement With Respect to Shares filed in respect thereof.
     7. Adjustments to the Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
          (a) Stock Splits, Stock Dividends, Etc. If, at any time on or after
the date hereof, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, combination, reclassification or other similar
event, the Conversion Price for each share of Series D Preferred Stock shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination or reclassification of
shares, or other similar event, the Conversion Price for each share of Series D
Preferred Stock shall be proportionately increased.
          (b) Adjustment Due to Merger, Consolidation, Etc. If, at any time
after the date hereof, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged),
(iii) any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i) - (iv) above being a “Corporate Change”), and, if such Corporate Change is
not a Liquidation Event pursuant to the terms of Section 6(a), then the Holders
shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable in such Corporate
Change with respect to or in exchange for the number of shares of Common Stock
which would have been issuable upon conversion had such Corporate Change not
taken place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the Holders of a majority of the Series D Preferred
Stock then outstanding) shall be made with respect to the rights and interests
of the Holders to the end that the economic value of the shares of Series D
Preferred Stock are in no way diminished by such Corporate Change and that the
provisions hereof (including, without limitation, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is not the Corporation, an immediate adjustment of the Conversion Price for each
share of Series D Preferred Stock so that the Conversion Price immediately after
the Corporate Change reflects the same relative value as compared to the value
of the surviving entity’s common stock that existed between the Conversion Price
and the value of the Common Stock immediately prior to such Corporate Change).

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          (c) Adjustment Due to New Issuances of Equity Securities Below the
Conversion Price.
               (i) Weighted Average Anti-Dilution Formula.
                    (A) If the Corporation issues, after the date hereof (the
“Effective Date”), any Additional Stock (as defined below) without consideration
or for a consideration per share less than the Conversion Price for any
sub-series of the Series D Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such sub-series of
the Series D Preferred Stock in effect immediately prior to each such issuance
shall forthwith (except as otherwise provided in this Section 7(c)(i)) be
reduced to a price determined in accordance with the following formula:
CP2 = CP1 * (A + B) ÷ (A + C).
               For purposes of the foregoing formula, the following definitions
shall apply:
               (1) “CP2” shall mean the Conversion Price for the Series D
Preferred Stock in effect immediately after such issue of Additional Stock
               (2) “CP1” shall mean the Conversion Price of the Series D
Preferred Stock in effect immediately prior to such issue of Additional Stock;
               (3) “A” shall mean the number of shares of Common Stock actually
outstanding immediately prior to such issuance of Additional Stock (excluding
shares of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
               (4) “B” shall mean the number of additional shares of Common
Stock that would have been issued if such Additional Stock had been issued at a
price per share equal to CP1 (determined by dividing the aggregate consideration
received by the Corporation in respect of such issue by CP1); and
               (5) “C” shall mean the number of such Additional Stock issued in
such transaction.
                    (B) No adjustment of the Conversion Price for any series of
Series D Preferred Stock will be made in an amount less than one cent per share,
provided that any adjustments that are not required to be made by reason of this
sentence will be carried forward and shall be either taken into account in any
subsequent adjustment made prior to three (3) years from the date of the event
giving rise to the adjustment being carried forward, or will be made at the end
of three (3) years from the date of the event giving rise to the adjustment
being carried forward. Except to the limited extent provided for in
Sections 7(c)(i)(E)(3) and 7(c)(i)(E)(4), no adjustment of such Conversion Price
pursuant to this Section 7(c)(i) shall have the effect of increasing the
Conversion Price above the Conversion Price in effect immediately prior to such
adjustment.

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                    (C) In the case of the issuance of Common Stock for cash,
the consideration will be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
                    (D) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash will be deemed to be the fair value thereof as determined in good faith by
the Board of Directors irrespective of any accounting treatment.
                    (E) In the case of the issuance (whether before, on or after
the Effective Date) of warrants, options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or warrants, options to purchase or rights to subscribe for such
convertible or exchangeable securities, the following provisions will apply for
all purposes of this Section 7(c)(i) and Section 7(c)(ii):
          (1) The aggregate maximum number of shares of Common Stock deliverable
upon exercise (to the extent then exercisable) of such warrants, options to
purchase or rights to subscribe for Common Stock will be deemed to have been
issued at the time such warrants, options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Sections 7(c)(i)(C) and 7(c)(i)(D)), if any, received by the Corporation upon
the issuance of such warrants, options or rights plus the minimum exercise price
provided in such warrants, options or rights the Common Stock covered thereby.
          (2) The aggregate maximum number of shares of Common Stock deliverable
upon conversion of, or in exchange (to the extent then convertible or
exchangeable) assuming the satisfaction of any conditions to convertibility or
exchangeability, including, without limitation, the passage of time, for any
such convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof will be deemed to have been issued
at the time such securities were issued or such options or rights were issued
and for a consideration equal to the consideration, if any, received by the
Corporation for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
minimum additional consideration, if any, to be received by the Corporation upon
the conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the manner
provided in Sections 7(c)(i)(C) and 7(c)(i)(D)).
          (3) In the event of any change in the number of shares of Common Stock
deliverable or in the consideration payable to the Corporation upon exercise of
such options or rights or upon conversion of or in exchange for such convertible
or exchangeable securities, including, but not limited to, a change resulting
from the antidilution provisions thereof, the Conversion Price of the Series D
Preferred Stock, to the extent in any way affected by or computed using such
options, rights or securities, will be recomputed to reflect such change, but no
further adjustment will be made for the

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actual issuance of Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion or exchange of such
securities.
          (4) Upon the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any options or
rights related to such convertible or exchangeable securities, the Conversion
Price of the Series D Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, will be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
that remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
          (5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to Sections 7(c)(i)(E)(1) and
7(c)(i)(E)(2) will be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 7(c)(i)(E)(3) or
7(c)(i)(E)(4).
               (ii) Definition of Additional Stock. “Additional Stock” means any
shares of Common Stock issued (or deemed to have been issued pursuant to
Section 7(c)(i)(E)) by the Corporation after the date hereof other than:
                    (a) shares of Common Stock issued pursuant to a transaction
described in Section 7(a) hereof;
                    (b) shares of Common Stock issued or issuable to any
employee, officer, director, consultant or advisor of the Corporation for
services provided to the Corporation directly or pursuant to any employee
benefit plan which has been approved by the Board of Directors of the
Corporation, so long as the total number of shares of Common Stock so issued or
issuable (and not repurchased at cost by the Corporation in connection with the
termination of employment or other provision of services to the Corporation and
not subject to options that expire unexercised) does not exceed 1,366,890
shares;
                    (c) shares of Common Stock issued or issuable pursuant to a
bona fide firm commitment underwritten public offering with a nationally
recognized underwriter that generates gross proceeds in excess of $30,000,000
and that is approved by the Board of Directors of the Corporation, including the
Series D Director Nominee;
                    (d) shares of Common Stock issued pursuant to the
conversion, exchange or exercise of convertible or exercisable securities
outstanding as of the date hereof or subsequently issued pursuant to this
Section 7(c)(ii);
                    (e) shares of Common Stock issued or issuable in connection
with a bona fide business acquisition of or by the Corporation, whether by
merger, consolidation, sale of assets, sale or exchange of stock or otherwise
that is approved by the Board of Directors of the Corporation, including the
Series D Director Nominee;

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                    (f) shares of Common Stock issuable upon conversion of any
shares of any sub-series of Series D Preferred Stock;
                    (g) shares of Common Stock issuable upon exercise of those
certain warrants to purchase common stock issued or issuable in connection with
the transactions contemplated by that certain Secured Credit Facility and
Warrant Purchase Agreement dated as of April ___, 2009 by and between the
Corporation and H.F. Lenfest ) (the “2009 Purchase Agreement”);
                    (h) shares of Preferred Stock issued to H.F. Lenfest (or his
designee) pursuant to the terms of the 2009 Purchase Agreement; or
                    (i) shares of Common Stock issued pursuant to a transaction
in which the Conversion Price adjustments set forth in this Section 7(c) are
waived by the holders of at least a majority of the then outstanding shares of
Series D Preferred Stock.
          (d) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Section 7, the Corporation
shall promptly compute such adjustment or readjustment and prepare and furnish
to each Holder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
     8. Voting Rights.
          (a) General. The Holders shall be entitled to vote with the holders of
Common Stock, voting together as one class, on all matters submitted to a vote
of the holders of Common Stock, and each share of Series D Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which each such share is convertible as of the record date for the
applicable vote. To the extent that under the Pennsylvania Business Corporation
Law the vote of the Holders, voting separately as a class or series, as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the Holders of at least a majority of the then
outstanding shares of Series D Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the Holders of at
least a majority of the then outstanding shares of Series D Preferred Stock
shall constitute the approval of such action by the class. On all matters
submitted to vote or consent of the holders of Series D Preferred Stock, all
sub-series of Series D Preferred Stock shall vote together as one class.
          (b) Election of Directors. So long as any shares of Series D Preferred
Stock remain outstanding, the Board of Directors will consist of five
(5) members, one of which shall be the Chief Executive Officer, or similar
position, of the Corporation and one of which shall be nominated by the holders
of shares of Series D Preferred Stock, voting separately as a single class (the
“Series D Director Nominee”), which director may be removed from office, and any
vacancy caused by the resignation, death or removal of the Series D Director
Nominee shall be filled by the holders of a majority of the then outstanding
shares of Series D Preferred Stock.
     9. Protective Provisions. So long as any of the shares of Series D
Preferred Stock are outstanding, the Corporation shall not, without first
obtaining the approval (by vote or written

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consent) of the Holders of a majority of the then outstanding shares of Series D
Preferred Stock (i) amend the rights, preferences or privileges of the Series D
Preferred Stock set forth in this Statement With Respect to Shares; (ii) create
any new class or series of capital stock that would constitute Senior Securities
or Pari Passu Securities (except as contemplated under the terms of the 2009
Purchase Agreement); (iii) redeem, or declare or pay any dividend or other
distribution on account of, any shares of Common Stock or Junior Securities
(other than pursuant to the terms of any stock option plan for directors,
officers, employees, advisors or consultants approved by the Board of
Directors); (iv) amend, alter or repeal any provision of the Articles of
Incorporation or Bylaws of the Corporation; (v) effect any transaction that
would be deemed a Liquidation Event (as defined in Section 6(a)) or Corporate
Change (as defined in Section 7(b) hereof); (vi) authorize or enter into any
transaction or series or related transactions in which the holder or holders of
capital stock of the Corporation immediately prior to such transaction or series
of transactions will hold, immediately after such transaction or series of
transactions, less than a majority of the aggregate voting power of the
outstanding capital stock of the surviving entity; (vii) increase or decrease
the authorized number of directors constituting the Board of Directors;
(viii) decrease the number of authorized shares of Preferred Stock; (ix) redeem
or offer to redeem any shares of Series D Preferred Stock; (x) authorize or
effect a transaction in which the Corporation would incur any debt secured by
the assets of the Corporation or amend its current secured debt facility; or
(xi) enter into any transaction, other than employment or consulting agreements
in the ordinary course of business on a basis consistent with past practices,
with any officer, director or beneficial owner of five percent (5%) or more of
the Common Stock or any affiliate of the foregoing. Notwithstanding the
foregoing, no consent or approval of the Holders will be required for, and the
Board of Directors is expressly authorized to provide for, the issuance of
shares of Preferred Stock if such series would constitute Junior Securities, by
filing a certificate pursuant to the applicable law of the Commonwealth of
Pennsylvania, to establish from time to time the number of shares to be included
in each such series, and to fix the designation, powers, preferences and rights
of the shares of each such series and any qualifications, limitations or
restrictions thereon.
     10. Miscellaneous.
          (a) Cancellation of Series D Preferred Stock. If any shares of
Series D Preferred Stock are converted pursuant to Section 4, the shares so
converted shall be canceled, shall return to the status of authorized, but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Corporation as Series D Preferred Stock.
          (b) Lost or Stolen Certificates. Upon receipt by the Corporation of
(i) evidence of the loss, theft, destruction or mutilation of any Series D
Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to the Corporation, or (z) in
the case of mutilation, upon surrender and cancellation of the Series D
Preferred Stock Certificate(s), the Corporation shall execute and deliver new
Series D Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Series D
Preferred Stock Certificate(s) if the Holder contemporaneously requests the
Corporation to convert such Series D Preferred Stock.
          (c) Status as Shareholder. Upon submission of a Notice of Conversion
by a Holder, (i) the shares covered thereby and any accrued and unpaid Accruing
Dividends thereon

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shall be deemed converted into shares of Common Stock and (ii) the Holder’s
rights as a holder of such converted shares of Series D Preferred Stock shall
cease and terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such Holder because of a failure by the
Corporation to comply with the terms of this Statement With Respect to Shares.
     THIRD: With respect to the Series D Preferred Stock, the aggregate number
of shares of such class or Series established and designated by (a) such
resolutions, (b) all prior statements, if any, filed under 15 Pa. C.S. § 1522 or
corresponding provisions of prior law with respect thereto, and (c) any other
provision of the Articles of Incorporation is 11,000 shares.
     FOURTH: The resolution was adopted by the Audit Committee of the Board of
Directors effective as of April ___, 2009.
     FIFTH: The resolution shall be effective upon the filing of this Statement
With Respect to Shares in the Department of State.
* * * * * *
[Signature Page Follows]

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     IN WITNESS WHEREOF, the undersigned has caused this Statement With Respect
to Shares to be signed by a duly authorized officer this                 day of
April, 2009.

            ENVIRONMENTAL TECTONICS
CORPORATION, a Pennsylvania corporation
      By:           Name:           Title:      

 

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NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series D Preferred Stock)
The undersigned hereby irrevocably elects to convert                      shares
of Series D Preferred Stock, represented by stock certificate No(s).
                     (the “Series D Preferred Stock Certificates”), into shares
of common stock (“Common Stock”) of Environmental Tectonics Corporation (the
“Corporation”) according to the conditions of the Statement With Respect to
Shares of Series D Convertible Preferred Stock, as of the date written below. If
securities are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto. No fee
will be charged to the holder for any conversion, except for transfer taxes, if
any. A copy of each Series D Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
[The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee (which is                     ) with DTC through its Deposit Withdrawal
Agent Commission System (“DTC Transfer”).]
The undersigned acknowledges that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series D Preferred
Stock may only be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the “Act”), or pursuant to an exemption from
registration under the Act.

o     [In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby requests
that the Corporation issue and deliver to the undersigned physical certificates
representing such shares of Common Stock.]

       
Date of Conversion:
             
Conversion Price:
              Number of Shares of Common
Stock to be Issued: _______________________________  

            [Holder]
      By:           Name:           Title:        

            Address:                   

 

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EXHIBIT E
FORM OF SECURITY AGREEMENT
SECURITY AGREEMENT
          This SECURITY AGREEMENT (this “Agreement”) is made and entered into as
of April 24, 2009, by and among ENVIRONMENTAL TECTONICS CORPORATION (the
“Borrower”), ENTERTAINMENT TECHNOLOGY CORPORATION (the “Guarantor” and, together
with the Borrower, the “Debtors”), and H.F. LENFEST (the “Lender”), in
connection with the transactions contemplated by that certain Secured Credit
Facility and Warrant Purchase Agreement of even date herewith by and between the
Borrower and the Lender (the “Purchase Agreement”). Capitalized terms used but
not otherwise defined herein shall have the meanings assigned to them in the
Purchase Agreement.
WITNESSETH:
          WHEREAS, the Guarantor has delivered to the Lender a Guaranty, dated
as of the date hereof, in respect of the obligations of the Borrower under the
Purchase Agreement (the “Guaranty”);
          WHEREAS, pursuant to the provisions of the Purchase Agreement and upon
the terms and subject to the conditions set forth therein, the Lender has agreed
to provide (i) advances under a credit facility (the “Credit Facility”) to the
Borrower to be evidenced by one or more senior subordinated promissory notes
issued by the Borrower thereunder in the aggregate principal amount of up to
$7,500,000 (the “Notes”) and/or (ii) guaranties of an additional $5,000,000 of
Senior Debt as part of an amendment to the Senior Credit Agreement (the
“Purchaser Guaranties”);
          WHEREAS, it is a condition precedent to the obligation of the Lender
to provide the Credit Facility and the Purchaser Guaranties to the Borrower
under the Purchase Agreement, that the Debtors shall have executed and delivered
this Agreement to the Lender;
          WHEREAS, the rights granted to the Lender herein shall be subject to
the terms and conditions of the Subordination Agreement.
          NOW, THEREFORE, in consideration of the premises contained herein and
to induce the Lender to enter into the Purchase Agreement and to induce the
Lender to provide the Credit Facility and/or the Purchaser Guaranties to the
Borrower under the Purchase Agreement, the Debtors hereby agree with the Lender,
as follows:
     1. Defined Terms. Unless otherwise defined herein or in the Purchase
Agreement, the following terms which are defined in the Code are used herein as
so defined: Accounts (including Health-Care-Insurance Receivables), Chattel
Paper (including Electronic Chattel Paper and Tangible Chattel Paper),
Commercial Tort Claims, Deposit Accounts, Documents, Equipment, Farm Products,
Financial Assets, General Intangibles, Instruments, Inventory, Investment
Property (including Securities Entitlements, Securities Accounts, Commodity
Accounts and Commodity Contracts), Letter-of-Credit Rights, Payment Intangibles,
Software,

 

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Supporting Obligations and Proceeds; and the following terms shall have the
following meanings:
          “Code” shall mean the Uniform Commercial Code as from time to time in
effect in the Commonwealth of Pennsylvania.
          “Collateral” shall have the meaning assigned to it in Section 2 of
this Agreement.
          “Contracts” shall mean all contracts and other agreements between any
Debtor and any other Person, as the same may from time to time be amended,
supplemented or otherwise modified, including, without limitation, (a) all
rights of each Debtor to receive moneys due and to become due to it thereunder
or in connection therewith, (b) all rights of each Debtor to damages arising out
of, or for, breach or default in respect thereof and (c) all rights of each
Debtor to perform and to exercise all remedies thereunder.
          “Copyrights” shall mean (a) all copyrights, registrations and
applications for registration, issued or filed, including any reissues,
extensions or renewals thereof, by or with the United States Copyright Office or
any similar office or agency of the United States, any State thereof, or any
other country or political subdivision thereof, or otherwise, including, all
rights in and to the material constituting the subject matter thereof,
including, without limitation, any referred to in Schedule I hereto, and (b) any
rights in any material which is copyrightable or which is protected by common
law, United States copyright laws or similar laws or any law of any State,
including, without limitation, any thereof referred to in Schedule I hereof.
          “Copyright License” shall mean any agreement, written or oral,
providing for a grant by any of the Debtors of any right in any Copyright,
including, without limitation, any thereof referred to in Schedule I hereof.
          “Obligations” shall mean the unpaid principal amount of, and interest
on (including, without limitation, interest accruing after the maturity of the
Credit Facility and interest accruing after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, relating to any of the Debtors, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding) the Notes,
any and all amounts guaranteed under the Purchaser Guaranties and all other
obligations and liabilities of the Debtors to the Lender, whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with, the
Purchase Agreement, the Notes, this Agreement, the Guaranty, the other
Transaction Documents, and any other document made, delivered or given in
connection therewith or herewith, whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses (including,
without limitation, all fees and disbursements of counsel to the Lender that are
required to be paid by the Debtors pursuant to the terms of the Purchase
Agreement or any other Transaction Document) or otherwise.
          “Patents” shall mean (a) all letters patent of the United States or
any other country or any political subdivision thereof, and all reissues and
extensions thereof, including, without limitation, any thereof referred to in
Schedule II hereto, and (b) all applications for letters patent of the United
States and all divisions, continuations and continuations-in-part

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thereof or any other country or any political subdivision, including, without
limitation, any thereof referred to in Schedule II hereto.
          “Patent License” shall mean all agreements, whether written or oral,
providing for the grant by any of the Debtors of any right to manufacture, use
or sell any invention covered by a Patent, including, without limitation, any
thereof referred to in Schedule II hereto.
          “Trademarks” shall mean (a) all trademarks, trade names, corporate
names, company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and the goodwill
associated therewith, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or any political subdivision thereof, or otherwise, including, without
limitation, any thereof referred to in Schedule III hereto, and (b) all
reissues, extensions or renewals thereof.
          “Trademark License” shall mean any agreement, written or oral,
providing for the grant by any of the Debtors of any right to use any Trademark,
including, without limitation, any thereof referred to in Schedule III hereto.
     2. Grant of Security Interest. As collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Obligations, each of the Debtors hereby grants
to the Lender a security interest in all of the following property now owned or
at any time hereafter acquired by such Debtor or in which such Debtor now has or
at any time in the future may acquire any right, title or interest
(collectively, the “Collateral”):
          (i) all Accounts (including Health-Care-Insurance Receivables);
          (ii) all Chattel Paper (including Electronic Chattel Paper and
Tangible Chattel Paper);
          (iii) all Contracts;
          (iv) all Copyrights and Copyright Licenses;
          (v) all Deposit Accounts;
          (vi) all Documents;
          (vii) all Equipment;
          (viii) all General Intangibles and Commercial Tort Claims;
          (ix) all Instruments;
          (x) all Inventory;

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          (xi) all Investment Property, (including Securities Entitlements,
Securities Accounts, Commodity Accounts, and Commodity Contracts);
          (xii) all Letter-of-Credit Rights;
          (xiii) all Patents and Patent Licenses;
          (xiv) all Payment Intangibles;
          (xv) all Software (in whatever form);
          (xvi) Supporting Obligations;
          (xvii) Trademarks and Trademark Licenses; and
          (xviii) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing.
     3. Rights of Lender; Limitations on Lender’s Obligations.
          (a) Debtors Remain Liable under Accounts and Contracts. Anything
herein to the contrary notwithstanding, the Debtors shall remain liable under
each of the Accounts and Contracts to observe and perform all the conditions and
obligations to be observed and performed by it thereunder, all in accordance
with the terms of any agreement giving rise to each such Account and in
accordance with and pursuant to the terms and provisions of each such Contract.
The Lender shall have no obligation or liability under any Account (or any
agreement giving rise thereto) or under any Contract by reason of or arising out
of this Agreement or the receipt by the Lender of any payment relating to such
Account or Contract pursuant hereto, nor shall the Lender be obligated in any
manner to perform any of the obligations of the Debtors under or pursuant to any
Account (or any agreement giving rise thereto) or under or pursuant to any
Contract, to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Account (or any agreement giving rise
thereto) or under any Contract, to present or file any claim, to take any action
to enforce any performance or to collect the payment of any amounts which may
have been assigned to it or to which it may be entitled at any time or times.
          (b) Notice to Account Debtors and Contracting Parties. Upon the
request of the Lender at any time after the occurrence and during the
continuance of an Event of Default, the Debtors shall notify account debtors on
the Accounts and parties to the Contracts that the Accounts and the Contracts
have been assigned to the Lender and shall indicate on all billings that
payments in respect thereof shall be made directly to the Lender. The Lender may
in the name of the Debtors or in the name of others communicate with account
debtors on the Accounts and parties to the Contracts to verify with them to its
satisfaction the existence, amount and terms of any Accounts or Contracts.
          (c) Analysis of Accounts. The Lender shall have the right to make test
verifications of the Accounts through periodic site visits as provided in
Section 7.1(i) of the Purchase Agreement, and the Debtors shall furnish all such
assistance and information as the

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Lender may reasonably require in connection therewith. At any time, and from
time to time, but in no event more than twice in any given twelve month period,
upon the Lender’s request and at the expense of the Debtors, the Debtors shall
cause independent public accountants or others satisfactory to the Lender to
furnish to the Lender reports showing reconciliations, aging and test
verifications of, and trial balances for, the Accounts; provided that any such
reconciliation, aging or test verification performed at the request of PNC Bank,
National Association (“PNC”) and delivered to the Lender shall satisfy a like
request from the Lender if made within six (6) months of the request from PNC.
          (d) Collections on Accounts. Subject to the further provisions of this
Section 3(d), the Lender hereby authorizes the Debtors to collect the Accounts
from the account debtors. Prior to the occurrence of an Event of Default, the
Proceeds of Accounts so collected by the Debtors shall be received and held by
the Debtors in trust for the Lender but may be applied by the Debtors in their
discretion towards payment of the Obligations or other corporate purposes. Upon
the occurrence of an Event of Default which has not been waived by or cured to
the satisfaction of the Lender and subject to the direction of the Lender,
(i) the authority hereby given to the Debtors to collect the Proceeds of
Accounts may be terminated by the Lender at any time and after being notified of
such termination, the Debtors shall deliver to the Lender on the date of receipt
thereof by the Debtors all Proceeds in the form of cash, checks, drafts, notes
and other remittances received in payment of or on account of the Debtors’
Accounts; (ii) following receipt by the Lender any such Proceeds shall be
deposited in a special bank account (the “Cash Collateral Account”) of the
Debtors maintained at a commercial bank chosen by the Lender over which the
Lender alone shall have power of withdrawal; (iii) all Proceeds other than cash
shall be deposited in precisely the form in which received, except for the
addition thereto of the endorsement of the Debtors when necessary to permit
collection of the items, which endorsement the Debtors agree to make; and
(iv) the Debtors will not commingle any such Proceeds with any of the Debtors’
other funds or property but will hold them separate and apart from any other
funds or property and upon an express trust for the Lender until deposit thereof
is made in the Cash Collateral Account.
     4. Representations and Warranties. The Debtors hereby jointly and severally
represent and warrant that:
          (a) Title; No Other Liens. Except for the Liens granted hereby, the
Liens granted to PNC pursuant to the PNC Security Agreement and any other
Permitted Liens, one or more of the Debtors own each item of the Collateral free
and clear of any and all Liens or claims of others. No security agreement,
financing statement or other public notice with respect to all or any part of
the Collateral is on file or of record in any public office, except such as may
have been filed in favor of the Lender, pursuant to this Agreement or as may be
permitted pursuant to the Purchase Agreement.
          (b) Perfected Second Priority Liens. Upon the Lender taking all action
necessary under the UCC to perfect its security interest in and to the
Collateral, the Liens granted pursuant to this Agreement constitute perfected
Liens on the Collateral in favor of the Lender, which are prior to all other
Liens on the Collateral in existence on the date hereof (other than Permitted
Liens) and are enforceable as such against all creditors of and purchasers from
the

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Debtors and against any owner or purchaser of the real property where any of the
Equipment is located and any present or future creditor obtaining a Lien on such
real property.
          (c) Accounts. The amount represented by the Debtors to the Lender in
any accounts receivable aging and in other reports requested by or furnished to
the Lender as owing by each account debtor or by all account debtors in respect
of the Accounts will at such time be the correct amount actually owing by such
account debtor or debtors thereunder except for normal cash discounts and
allowances where applicable. No amount payable to the Debtors under or in
connection with any Account is evidenced by any Instrument or Chattel Paper
which has not been delivered to the Lender. The Debtors keep their records
concerning the Accounts at the location or locations set forth in Schedule IV.
          (d) Contracts. Except as contemplated hereby, no consent of any party
(other than the Debtors) to any material Contract is required, or purports to be
required, in connection with the execution, delivery and performance of this
Agreement. Each material Contract is in full force and effect and constitutes a
valid and legally enforceable obligation of the parties thereto, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditor’s rights
generally. No consent or authorization of, filing with or other act by or in
respect of any Governmental Authority is required in connection with the
execution, delivery, performance, validity or enforceability of any of the
Contracts by any party thereto other than those which have been duly obtained,
made or performed, are in full force and effect and do not subject the scope of
any such Contract to any material adverse limitation, either specific or general
in nature. Neither the Debtors nor (to the best of the Debtors’ knowledge) any
other party to any Contract are in default of any material provision thereof or
are likely to become in default in the performance or observance of any of the
material provisions thereof. The Debtors have fully performed all their material
obligations under each Contract. The right, title and interest of each Debtor
in, to and under each Contract to which such Debtor is a party are not subject
to any defense, offset, counterclaim or claim which would materially adversely
affect the value of such Contract as Collateral, nor have any of the foregoing
been asserted or alleged against the Debtors as to any Contract. No amount
payable to the Debtors under or in connection with any Contract is evidenced by
any Instrument or Chattel Paper which has not been delivered to the Lender.
          (e) Inventory. The types, amounts and valuations of the Inventory or
any other information regarding the same represented by the Debtors in any
reports requested by or furnished to the Lender, or any other holders of the
Obligations will at such time be accurate to the best of the Debtors’ knowledge.
The Debtors keep records concerning the Inventory at the location or locations
listed on Schedule V. Except for Inventory in transit, work in progress at other
locations and consigned Inventory, the Inventory is kept at the locations listed
on Schedule VI hereto.
          (f) Equipment. The Equipment is kept at the locations listed on
Schedule VII hereto.
          (g) Chief Executive Office; Place of Organization. The locations of
each Debtor’s chief executive office, chief place of business, form of and place
of organization are set forth on Schedule VIII.

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          (h) Farm Products. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.
          (i) Patents, Trademarks and Copyrights. Schedule I hereto includes all
Copyrights and Copyright Licenses (except licenses to use off-the-shelf software
in the ordinary course of business) owned by the Debtors in its own name as of
the date hereof. Schedule II hereto includes all Patents and Patent Licenses
owned by each of the Debtors in its own name as of the date hereof. Schedule III
hereto includes all Trademarks and Trademark Licenses owned by each of the
Debtors in its own name as of the date hereof. To the best of the Debtors’
knowledge, each Copyright, Patent and Trademark is valid, subsisting, unexpired,
enforceable and has not been abandoned. Except as set forth in any such
Schedule, none of such Copyrights, Patents or Trademarks is the subject of any
licensing or franchise agreement. No holding, decision or judgment has been
rendered by any Governmental Authority which would limit, cancel or question the
validity of any Copyright, Patent or Trademark. Except as set forth in any such
Schedule, no action or proceeding is pending (i) seeking to limit, cancel or
question the validity of any Copyright, Patent or Trademark, or (ii) which, if
adversely determined, would have a material adverse effect on the value of any
Copyright, Patent or Trademark.
          (j) Power and Authority; Authorization. The Debtors have the corporate
or other power and authority and the legal right to execute and deliver, to
perform their obligations under, and to grant the Liens on the Collateral
pursuant to, this Agreement and have taken all necessary corporate or other
action to authorize its execution, delivery and performance of, and grant of the
Liens on the Collateral pursuant to, this Agreement.
          (k) Enforceability. This Agreement constitutes a legal, valid and
binding obligation of each of the Debtors enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally.
          (l) No Conflict. The execution, delivery and performance of this
Agreement will not violate any provision of any Law or any obligation under any
agreement, instrument, document or contract to which any of the Debtors is a
party (each, a “Contractual Obligation”) and will not result in the creation or
imposition of any Lien on any of the properties or revenues of any of the
Debtors pursuant to any Law or Contractual Obligation of any of the Debtors,
except as contemplated hereby.
          (m) No Consents, etc. Except as contemplated hereby, no consent or
authorization of, filing with, or other act by or in respect of, any arbitrator
or Governmental Authority and no consent of any other Person (including, without
limitation, any stockholder or creditor of any of the Debtors), is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement (except for the filing of the UCC financing statements).
          (n) No Litigation. Except as set forth on Schedule 5.1(j) to the
Purchase Agreement, no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of the
Debtors, threatened by or against any of the

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Debtors or against any of its properties or revenues with respect to this
Agreement or any of the transactions contemplated hereby.
     5. Covenants. Each of the Debtors covenants and agrees with the Lender
that, from and after the date of this Agreement until the Obligations are paid
in full and the Credit Facility is terminated, it will:
          (a) Notices; Further Documentation; Authorization to File Financing
Statements. Notify the Lender in writing at any time that it opens, acquires,
obtains, or becomes the beneficiary of any type of Collateral (or rights
therein) to the extent the Lender will not at that time have, and continuously
thereafter (subject to the filing of continuation statements, if necessary)
maintain, a perfected priority security interest in (subject to solely Permitted
Liens) such Collateral, including but not limited to: all Deposit Accounts,
Securities Accounts and Commodity Accounts and other Investment Property; all
Commercial Tort Claims; all Instruments, Documents, Tangible Chattel Paper and
Electronic Chattel Paper; all other Collateral in the possession of a third
party; and all Letter-of-Credit Rights and other Supporting Obligations. At any
time and from time to time, upon the written request of the Lender, and at the
sole expense of the Debtors, promptly (i) deliver to the Lender all letters of
credit and other Supporting Obligations, Instruments, Chattel Paper, Documents
and Investment Property (including any necessary endorsements) that at any time
is part of the Collateral or becomes Proceeds of any Collateral unless in
possession of a lien holder with a prior Permitted Lien, and (ii) execute and
deliver such further instruments, agreements and documents and take such further
action as the Lender may reasonably request for the purpose of obtaining,
preserving and enforcing the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, executing and
delivering and using commercially reasonable efforts to cause third parties to
execute and deliver to the Lender security agreements, pledge agreements,
control agreements, bailee acknowledgments, assignments and waivers, all in form
and substance satisfactory to the Lender. The Debtors will mark all Chattel
Paper with a legend indicating that the Lender has a security interest in the
Chattel Paper.
     The Debtors also hereby authorize the Lender to file any Uniform Commercial
Code financing or continuation statement without the signature of the Debtors to
the extent permitted by applicable law. The Debtors hereby ratify any filing by
the Lender of financing statements prior to the date hereof with respect to the
Collateral. A carbon, photographic, facsimile or other reproduction of this
Agreement shall be sufficient as a financing statement for filing in any
jurisdiction.
          (b) Indemnification. Pay, and save the Lender and any other holders of
the Obligations harmless from, any and all liabilities, reasonable costs and
expenses (including, without limitation, reasonable legal fees and expenses)
(i) with respect to, or resulting from, any delay in paying any and all excise,
sales or other taxes which may be payable or determined to be payable with
respect to any of the Collateral, (ii) with respect to, or resulting from, any
delay in complying with any Law applicable to any of the Collateral or (iii) in
connection with protecting, storing, warehousing, appraising, insuring,
handling, maintaining and shipping the Collateral, all reasonable costs, fees
and expenses of creating, perfecting, maintaining and enforcing the security
interests created by this Agreement, and any and all excise, property, sales and
use taxes imposed by any federal, state, local or foreign authority on any of
the Collateral, or with respect

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to periodic appraisals and inspections of the Collateral, or with respect to the
sale or other disposition thereof. In any suit, proceeding or action brought by
the Lender under any Account or Contract for any sum owing thereunder, or to
enforce any provisions of any Account or Contract, the Debtors will save,
indemnify and keep the Lender harmless from and against all expense, loss or
damage suffered by reason of any defense, setoff, counterclaim, recoupment or
reduction of liability whatsoever of the account debtor or obligor thereunder,
arising out of a breach by the Debtors of any obligation thereunder or arising
out of any other agreement, indebtedness or liability at any time owing to or in
favor of such account debtor or obligor or its successors from the Debtors;
provided, however, that such expense, loss or damage does not arise from the
gross negligence or willful misconduct of the Lender.
          (c) Maintenance of Records. Keep and maintain at its own cost and
expense true, correct and complete records of the Collateral, including, without
limitation, a record of all payments received and all credits granted with
respect to the Accounts. For the Lender’s further security, the Lender shall
have a security interest in the Debtors’ books and records pertaining to the
Collateral, and the Debtors shall turn over copies of any such books and records
to the Lender or to its representatives during normal business hours at the
request of the Lender.
          (d) Right of Inspection and Audit. Give to the Lender, no more than
two (2) times during any twelve (12) month period, upon reasonable prior notice
full and free access during normal business hours (or following the occurrence
and during the continuance of an Event of Default, at any time) to all of its
books, correspondence and records and the Lender and its respective
representatives may examine, inspect or audit the same, take extracts therefrom
and make photocopies thereof, and the Debtors agree to render to the Lender, at
the Debtors’ cost and expense, such clerical and other assistance as may be
reasonably requested with regard thereto. The Lender and its respective
representatives shall at all times during normal business hours (or following
the occurrence of an Event of Default, at any time) also have the right without
breach of the peace to enter into and upon any premises where any of the
Inventory or Equipment is located for the purpose of examining, inspecting or
auditing the same, observing its use or otherwise protecting their interests
therein.
          (e) Compliance with Laws, etc. Comply in all material respects with
all Laws applicable to the Collateral or any part thereof or to the operation of
its business; provided, however, that the Debtors may contest any Law in any
reasonable manner which shall not, in the sole opinion of the Lender, adversely
affect the Lender’s rights or the priority of his Liens on the Collateral.
          (f) Compliance with Terms of Contracts, etc. Perform and comply in all
material respects with all of its material obligations under the Contracts and
all of its other Contractual Obligations relating to the Collateral.
          (g) Payment of Obligations. Pay promptly when due all taxes,
assessments and governmental charges or levies imposed upon the Collateral or in
respect of its income or profits therefrom, as well as all claims of any kind
(including, without limitation, claims for labor, materials and supplies)
against or with respect to the Collateral, except that no such charge need be
paid if (i) the validity thereof is being contested in good faith by appropriate
proceedings, (ii) such proceedings do not involve any material danger of the
sale, forfeiture or

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loss of any of the Collateral or any interest therein and (iii) such charge is
adequately reserved against on the Debtors’ books in accordance with GAAP.
          (h) Limitation on Liens on Collateral. Not create, incur or permit to
exist, will defend the Collateral against, and take such other action as is
necessary to remove, any Lien or claim on or to the Collateral, other than the
Permitted Liens, and will defend the right, title and interest of the Lender in
and to any of the Collateral against the claims and demands of all Persons
whomsoever.
          (i) Limitations on Dispositions of Collateral. Not sell, transfer,
lease or otherwise dispose of any of the Collateral, or attempt, offer or
contract to do so except as expressly permitted pursuant to the Purchase
Agreement or otherwise agreed to in writing by the Lender.
          (j) Limitations on Discounts, Compromises, Extensions of Accounts. Not
adjust, settle or compromise the amount or payment of any Account, or release
wholly or partly any customer or obligor thereof, or allow any credit or
discount thereon (other than adjustments, settlements, compromises, releases,
credits and discounts in the ordinary course of business and in amounts which
are not material to the Debtors) without the prior consent of the Lender.
          (k) Further Identification of Collateral. Furnish to the Lender, from
time to time, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the
Lender may reasonably request, all in reasonable detail.
          (l) Notices. Advise the Lender promptly, in reasonable detail, at its
address set forth in the Purchase Agreement, (i) of any Lien (other than
Permitted Liens) on, or claim asserted against, any of the Collateral and
(ii) of the occurrence of any other event which could reasonably be expected to
have a material adverse effect on the aggregate value of the Collateral or on
the Liens created hereunder.
          (m) Changes in Locations, Name, Place of Organization, etc. Unless it
shall have given the Lender at least 30 days prior written notice thereof, none
of the Debtors will (i) change the location of its chief executive office or
chief place of business from that specified in Schedule VIII attached hereto or
remove its books and records from the location specified in Section 4(g),
(ii) permit any of the Inventory or Equipment to be kept at a location other
than those listed on Schedule VI and Schedule VII hereto, (iii) change its name,
identity or corporate structure to such an extent that any financing statement
filed by the Lender in connection with this Agreement would become seriously
misleading or (iv) change the state of its organization.
          (n) Patents, Trademarks and Copyrights.
               (i) Unless any of the Debtors deems it appropriate in the
exercise of its reasonable business judgment to do otherwise and, if after the
occurrence of an Event of Default which has not been waived or cured to the
satisfaction of the Lender with the prior written consent of the Lender, (i)
continue to use each Trademark on each and every trademark class of goods
applicable to its current line as reflected in its current catalogs, brochures
and price lists in order to maintain such Trademark in full force free from any
claim of abandonment

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for non-use, (ii) maintain as in the past the quality of products and services
offered under such Trademark, (iii) employ such Trademark or Copyright with the
appropriate notice of registration, (iv) not adopt or use any mark which is
confusingly similar or a colorable imitation of such Trademark unless the Lender
shall obtain a perfected security interest in such mark pursuant to this
Agreement, and (v) not (and not permit any licensee or sublicensee thereof to)
do any act or knowingly omit to do any act whereby any Trademark or Copyright
may become invalidated.
               (ii) Not, unless any of the Debtors deems it appropriate in the
exercise of its reasonable business judgment to do otherwise and, if after the
occurrence of an Event of Default which has not been waived by or cured to the
satisfaction of the Lender with the prior written consent of the Lender, do any
act, or omit to do any act, whereby any Patent may become abandoned or
dedicated.
               (iii) Notify the Lender immediately if it knows, or has reason to
know, that any application or registration relating to any Patent, Trademark or
Copyright may become abandoned or dedicated, or of any adverse determination or
development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal in
any country) regarding its ownership of any Patent, Trademark or Copyright or
its right to register the same or to keep and maintain the same.
               (iv) Whenever any of the Debtors, either by itself or through any
agent, employee, licensee or designee, shall file an application for the
registration of any Patent, Trademark or Copyright with the United States Patent
and Trademark Office, the United States Copyright Office or any similar office
or agency in any other country or any political subdivision thereof, report such
filing to the Lender within five (5) Business Days after the last day of the
fiscal quarter in which such filing occurs. Upon request of the Lender, the
Debtors shall execute and deliver any and all agreements, instruments,
documents, and papers as the Lender may request to evidence the Lender’s
security interest in any Patent, Trademark or Copyright and the goodwill and
general intangibles of the Debtors relating thereto or represented thereby, and
the Debtors hereby constitute the Lender, its attorney-in-fact to execute and
file all such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed; such power being coupled with an interest
is irrevocable until the Obligations are paid in full and the Credit Facility is
terminated.
               (v) Take all reasonable and necessary steps, including, without
limitation, in any proceeding before the United States Patent and Trademark
Office, the United States Copyright Office or any similar office or agency in
any other country or any political subdivision thereof, to maintain and pursue
each application (and to obtain the relevant registration) and to maintain each
registration of the Patents, Trademarks and Copyrights, including, without
limitation, filing of applications for renewal, affidavits of use and affidavits
of incontestability.
               (vi) In the event that any Patent, Trademark or Copyright
included in the Collateral is materially infringed, misappropriated or diluted
by a third party, promptly notify the Lender after it learns thereof and shall,
unless it shall reasonably determine that such Patent, Trademark or Copyright is
of negligible economic value to it, which determination it shall

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promptly report to the Lender, promptly sue for infringement, misappropriation
or dilution, to seek injunctive relief where appropriate and to recover any and
all damages for such infringement, misappropriation or dilution, or take such
other actions as it shall reasonably deem appropriate under the circumstances to
protect such Patent, Trademark or Copyright.
     6. Lender’s Appointment as Attorney-in-Fact.
          (a) Powers. The Debtors hereby irrevocably constitute and appoint the
Lender and any agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of the Debtors and in the name of the Debtors or in its own name, from
time to time in the Lender’s discretion, for the purpose of carrying out the
terms of this Agreement, to take any and all appropriate action and to execute
any and all documents and instruments which may be necessary or desirable to
accomplish the purposes of this Agreement, and, without limiting the generality
of the foregoing, the Debtors hereby give the Lender the power and right, on
behalf of the Debtors, without notice to or assent by the Debtors, to do the
following:
               (i) in the case of any Account, at any time when the authority of
the Debtors to collect the Accounts has been curtailed or terminated pursuant to
Section 3(d) hereof, or in the case of any other Collateral, at any time when
any Event of Default shall have occurred and is continuing, in the name of the
Debtors or its own name, or otherwise, to take possession of and indorse and
collect any checks, drafts, notes, acceptances or other instruments for the
payment of moneys due under any Account, Instrument, General Intangible or
Contract or with respect to any other Collateral and to file any claim or to
take any other action or proceeding in any court of law or equity or otherwise
deemed appropriate by the Lender for the purpose of collecting any and all such
moneys due under any Account, Instrument, General Intangible or Contract or with
respect to any other Collateral whenever payable;
               (ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral (other than Permitted Liens), to effect any
repairs or procure any insurance called for by the terms of this Agreement and
to pay all or any part of the premiums therefor and the costs thereof;
               (iii) upon the occurrence and during the continuance of any Event
of Default, (A) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due thereunder
directly to the Lender or as the Lender shall direct; (B) to ask or demand for,
collect, receive payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of or arising out of
any Collateral; (C) to sign and indorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications, notices and other documents in connection with any
of the Collateral; (D) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any proceeds thereof and to enforce any other right in
respect of any Collateral; (E) to defend any suit, action or proceeding brought
against the Debtors or any of them with respect to any Collateral; (F) to
settle, compromise or adjust any suit, action or proceeding described in clause
(E) above and, in connection therewith, to give such discharges or releases as
the Lender may deem appropriate; (G) to assign any Patent or Trademark (along
with the

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goodwill of the business to which any such Trademark pertains), throughout the
world for such term or terms, on such conditions, and in such manner, as the
Lender shall in its sole discretion determine; and (H) subject to the terms of
Section 19, to sell, transfer, pledge and make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Lender were the absolute owner thereof for all purposes, and to do, at the
Lender’s option and the Debtors’ expense, at any time, or from time to time, all
acts and things which the Lender deems necessary to protect, preserve or realize
upon the Collateral and the Lender’s Liens thereon and to effect the intent of
this Agreement, all as fully and effectively as the Debtors might do; and
               (iv) execute in its own name or on behalf of the Debtors such UCC
financing Statements forms and similar instruments as the Lender may from time
to time deem reasonably necessary or desirable to protect the security interests
of the Lender and any other holders of the Obligations.
The Debtors hereby ratify all that said attorneys shall lawfully do or cause to
be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
          (b) Other Powers. The Debtors also authorize the Lender, and any other
holders of the Obligations, at any time and from time to time, to execute, in
connection with the sale provided for in Section 8 hereof, any endorsements,
assignments or other instruments of conveyance or transfer with respect to the
Collateral.
          (c) No Duty on the Lender’s Part. The powers conferred on the Lender
hereunder are solely to protect the Lender’s interests in the Collateral and
shall not impose any duty upon the Lender to exercise any such powers. The
Lender shall be accountable only for amounts that Lender actually receives as a
result of the exercise of such powers, and neither they nor any of their
officers, directors, employees or agents shall be responsible to the Debtors for
any act or failure to act hereunder, except for their own gross negligence or
willful misconduct.
     7. Performance by the Lender of Debtors’ Obligations. If any of the Debtors
fails to perform or comply with any of its agreements contained herein and the
Lender, as provided for by the terms of this Agreement, shall itself perform or
comply, or otherwise cause performance or compliance, with such agreement, the
expenses of the Lender incurred in connection with such performance or
compliance shall be payable by the Debtors to the Lender on demand and shall
constitute Obligations secured hereby, and if not promptly repaid to the Lender
shall bear interest thereon at a rate per annum equal to the Default Rate (as
defined in the Notes).
     8. Remedies.
          (a) If an Event of Default shall occur and be continuing and all
applicable notice and cure periods shall have expired, the Lender may exercise,
in addition to all other rights and remedies granted to it in this Agreement and
in any other instrument or agreement securing, evidencing or relating to the
Obligations, all rights and remedies of a secured party under the Code. Without
limiting the generality of the foregoing, the Lender, without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Debtors or any other Person (all and

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each of which demands, defenses, advertisements and notices are hereby waived),
may in such circumstances forthwith collect, receive, appropriate and realize
upon the Collateral, or any part thereof, and/or may forthwith sell, lease,
assign, give option or options to purchase, or otherwise dispose of and deliver
the Collateral or any part thereof (or contract to do any of the foregoing), in
one or more parcels at public or private sale or sales, at any exchange,
broker’s board or office of the Lender or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit risk.
The Lender shall have the right upon any such public sale or sales, and, to the
extent permitted by law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right or equity of
redemption in the Debtors, which right or equity is hereby waived or released.
The Debtors further agree, at the Lender’s request, to assemble the Collateral
and make it available to the Lender at places which the Lender shall reasonably
select, whether at the Debtors’ premises or elsewhere. The Lender shall apply
the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Collateral or in any way relating to the Collateral or the rights of the Lender
hereunder, including, without limitation, reasonable attorneys’ fees and
disbursements, to the payment in whole or in part of the Obligations, in such
order as the Lender may elect, and only after such application and after the
payment by the Lender of any other amount required by any provision of law,
including, without limitation, Section 9615 of the Code, need the Lender account
for the surplus, if any, to the Debtors. To the extent permitted by applicable
law, each of the Debtors waives all claims, damages and demands it may acquire
against the Lender arising out of the exercise by it of any rights hereunder. If
any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least 10 days before such sale or other disposition. The Debtors shall remain
liable for any deficiency if the proceeds of any sale or other disposition of
the Collateral are insufficient to pay the Obligations and the fees and
disbursements of any attorneys employed by the Lender to collect such
deficiency.
          (b) The Debtors agree, upon the occurrence and during the continuation
of an Event of Default, to take any actions that the Lender may request in order
to enable the Lender to obtain and enjoy the full rights and benefits granted to
the Lender under this Agreement and any other Transaction Documents. Without
limiting the generality of the foregoing, the Debtors shall upon the occurrence
and during the continuation of an Event of Default, at the Debtors’ sole cost
and expense, assist in obtaining all approvals which are then required by law
for or in connection with any action or transaction contemplated by this
Agreement or Article 9 of the Uniform Commercial Code as in effect in any
applicable jurisdiction.
     9. Limitation on Duties Regarding Preservation of Collateral. The Lender’s
sole duty with respect to the custody, safekeeping and physical preservation of
the Collateral in its possession, under Section 9207 of the Code or otherwise,
shall be to deal with it in the same manner as the Lender deals with similar
property for its own account. No holder of any Obligation, nor any of their
respective directors, officers, employees or agents shall be liable for failure
to demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Debtors or otherwise.

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     10. Powers Coupled with an Interest. All authorizations and agencies herein
contained with respect to the Collateral are irrevocable and powers coupled with
an interest.
     11. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
     12. Paragraph Headings. The paragraph headings used in this Agreement are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
     13. No Waiver; Cumulative Remedies. No holder of any Obligation shall by
any act (except by a written instrument pursuant to Section 14 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the any holder of the Obligations, any right, power
or privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by any holder of any Obligations of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
such holder would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are
not exclusive of any rights or remedies provided by law.
     14. Waivers and Amendments; Parties Bound; Governing Law. None of the terms
or provisions of this Agreement may be waived, amended, supplemented or
otherwise modified except by a written instrument executed by the Debtors and
the Lender; provided that any provision of this Agreement may be waived by the
Lender in a written letter or agreement executed by the Lender or by telex or
facsimile transmission from the Lender. This Agreement shall be the joint and
several obligation of the Debtors; each of the Debtors shall have made all of
the representations, warranties, covenants and agreements contained herein. This
Agreement shall be binding upon the respective successors and permitted assigns
of the Debtors and shall inure to the benefit of the Lender and its successors
and assigns. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
     15. Notices. All notices hereunder to the Debtors or the Lender to be
effective shall be in writing (including by telecopy), and, unless otherwise
expressly provided herein, shall be deemed to have been duly given or made when
delivered or sent in the manner and to the respective addresses as provided in
Section 9.7 of the Purchase Agreement.
     16. Submission to Jurisdiction; Waivers.
          (a) Each of the Debtors hereby irrevocably and unconditionally:

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               (i) submits for itself and its property in any legal action or
proceeding relating to this Agreement, or for recognition and enforcement of any
judgment in respect thereof to the exclusive jurisdiction of the courts of
Montgomery County, Commonwealth of Pennsylvania, the courts of the United States
of America for the Eastern District of Pennsylvania, and appellate courts from
any thereof;
               (ii) consents that any such action or proceeding shall be brought
in such courts, and waives (to the extent permitted by applicable law) any
objection that it may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;
               (iii) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to the
address set forth in the Purchase Agreement or at such other address of which
the Lender shall have been notified;
               (iv) waives and hereby acknowledges that it is estopped from
raising any objections based on forum non conveniens, any claim that any of the
above-referenced courts lack proper venue or any objection that any of such
courts lack personal jurisdiction over it so as to prohibit such courts from
adjudicating any issues raised in a complaint filed with such courts against it
concerning this Agreement;
               (v) acknowledges and agrees that the choice of forum contained in
this paragraph shall not be deemed to preclude the enforcement of any judgment
contained in any forum or the taking of any action under this Agreement to
enforce the same in any appropriate jurisdiction;
               (vi) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or proceeding referred
to in this subsection any special, exemplary or punitive or consequential
damages; and
               (vii) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
          (b) Each of the Debtors hereby unconditionally waives trial by jury in
any legal action or proceeding referred to in paragraph (a) above.
     17. Counterparts. This Agreement may be executed by one or more of the
parties to this Agreement on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Debtors and the Lender.
     18. Further Assurances. The parties acknowledge their intent that, upon the
occurrence and during the continuation of an Event of Default, the Lender shall
receive, to the fullest extent permitted by all Laws and governmental policy,
all rights necessary or desirable to obtain, use or sell the Collateral, and to
exercise all remedies available to it under this

16

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Agreement, the Uniform Commercial Code as in effect in any applicable
jurisdiction, or other applicable law. The parties further acknowledge and agree
that, in the event of any change in law or governmental policy occurring
subsequent to the date hereof that affects in any manner the Lender’s rights of
access to, or use or sale of, the Collateral, or the procedures necessary to
enable the Lender to obtain such rights of access, use or sale, the Lender and
the Debtors shall amend this Agreement in such manner as the Lender shall
request, in order to provide to the Lender such rights to the greatest extent
possible consistent with all Laws and governmental policy.
     19. Release. This Agreement and related instruments delivered to the Lender
hereunder shall be released by the Lender upon the date on which the Obligations
are paid in full and the Credit Facility is terminated. This Agreement shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Obligations is rescinded or must
otherwise be restored or returned by the Lender or any holder of the Obligations
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
any of the Debtors or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for any of the
Debtors or any substantial part of its property, or otherwise, all as though
such payments had not been made.
     20. CONFESSION OF JUDGMENT. EACH DEBTOR HEREBY IRREVOCABLY AUTHORIZES AND
EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT IN
THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR SUCH DEBTOR AT ANY
TIME OR TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS AGREEMENT,
THE PURCHASE AGREEMENT OR ANY OF THE NOTES IN ANY SUCH COURT IN ANY ACTION
BROUGHT AGAINST SUCH DEBTOR BY THE LENDER WITH RESPECT TO THE AGGREGATE AMOUNTS
PAYABLE UNDER THE PURCHASE AGREEMENT AND/OR THE NOTES, WITH OR WITHOUT
DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST SUCH DEBTOR FOR ALL SUMS PAYABLE BY SUCH DEBTOR TO THE LENDER UNDER THE
PURCHASE AGREEMENT AND/OR THE NOTES, AS EVIDENCED BY AN AFFIDAVIT SIGNED BY A
DULY AUTHORIZED DESIGNEE OF THE LENDER SETTING FORTH SUCH AMOUNT THEN DUE FROM
SUCH DEBTOR TO THE LENDER, PLUS AN ATTORNEY’S COMMISSION EQUAL TO TEN PERCENT
(10%) OF THE SUMS THEN OUTSTANDING UNDER THIS AGREEMENT AND THE NOTES, BUT IN NO
EVENT LESS THAN $25,000, WITH COSTS OF SUIT, RELEASE OF PROCEDURAL ERRORS, OTHER
THAN NOTICES THAT MAY BE REQUIRED HEREUNDER, AND WITHOUT RIGHT OF APPEAL. IF A
COPY OF THIS AGREEMENT, A NOTE AND/OR THE PURCHASE AGREEMENT, VERIFIED BY AN
AFFIDAVIT, SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO
FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. EACH DEBTOR WAIVES THE RIGHT TO ANY
STAY OF EXECUTION, THE BENEFIT OF ALL EXEMPTION LAWS NOW OR HEREAFTER IN EFFECT
AND ANY AND ALL RIGHTS TO PRIOR NOTICE AND HEARING WITH RESPECT TO THE
GARNISHMENT OR ATTACHMENT OF ANY PROPERTY PURSUANT TO A JUDGMENT ENTERED
HEREUNDER. NO SINGLE EXERCISE OF THE

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FOREGOING WARRANT AND POWER TO BRING ANY ACTION OR CONFESS JUDGMENT THEREIN
SHALL BE DEEMED TO EXHAUST THE POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED
AND MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS THE LENDER SHALL ELECT UNTIL
ALL AMOUNTS PAYABLE TO THE LENDER UNDER THE PURCHASE AGREEMENT AND/OR THE NOTES
SHALL HAVE BEEN PAID IN FULL. THE EXERCISE BY THE LENDER OF HIS RIGHTS AND
REMEDIES AND THE ENTRY OF ANY JUDGMENT BY THE LENDER UNDER THIS SECTION SHALL
NOT AFFECT IN ANY WAY THE INTEREST RATE PAYABLE HEREUNDER OR ANY OTHER AMOUNTS
DUE TO THE LENDER, BUT INTEREST SHALL CONTINUE TO ACCRUE ON SUCH AMOUNTS AT THE
DEFAULT RATE.
* * * * *

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          IN WITNESS WHEREOF, the Debtors and the Lender have caused this
Agreement to be duly executed and delivered as of the date first above written.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:           ENTERTAINMENT TECHNOLOGY
CORPORATION
      By:           Name:           Title:             H.F. Lenfest
                     

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EXHIBIT F
FORM OF REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
     THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this “Agreement”),
dated as of April 24, 2009, by and between Environmental Tectonics Corporation,
a corporation organized under the laws of the Commonwealth of Pennsylvania (the
“Company”), and H.F. Lenfest (“Lenfest”), a resident of the Commonwealth of
Pennsylvania. Capitalized terms used but not otherwise defined herein shall have
the meanings assigned to them in the Secured Credit Facility and Warrant
Purchase Agreement of even date herewith by and between the Company and Lenfest
(the “2009 Purchase Agreement”).
RECITALS
     A. To induce Lenfest to execute and deliver that certain Note and Warrant
Purchase Agreement dated as of February 19, 2003 by and between the Company and
Lenfest (the “2003 Note and Warrant Purchase Agreement”) pursuant to which the
Company issued and sold to Lenfest subordinated notes (the “Subordinated Notes”)
which are convertible into shares of the Company’s common stock, par value $0.05
per share (the “Common Stock”), and warrants to acquire shares of Common Stock
(the “2003 Warrants”), the Company granted certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations thereunder, or
any similar successor statute (collectively, the “Securities Act”), and
applicable state securities laws, to Lenfest pursuant to that certain
Registration Rights Agreement dated as of February 19, 2003 (the “2003
Registration Rights Agreement”).
     B. To induce Lenfest to execute and deliver that certain Preferred Stock
Purchase Agreement dated as of April 6, 2006 by and between the Company and
Lenfest (the “Series B Preferred Stock Purchase Agreement”) pursuant to which
the Company issued and sold to Lenfest shares of Series B Cumulative Convertible
Participating Preferred Stock of the Company, par value $0.05 per share (the
“Series B Preferred Stock”), which are convertible into shares of the Common
Stock, the Company granted certain registration rights under the Securities Act
to Lenfest pursuant to that certain Registration Rights Agreement dated as of
April 6, 2006 (the “2006 Registration Rights Agreement”).
     C. To induce Lenfest to execute and deliver that certain Preferred Stock
Purchase Agreement dated as of August 23, 2007 by and between the Company and
Lenfest (the “Series C Preferred Stock Purchase Agreement”) pursuant to which
the Company issued and sold to Lenfest shares of Series C Cumulative Convertible
Participating Preferred Stock of the Company, par value $0.05 per share (the
“Series C Preferred Stock”), which are convertible into shares of the Common
Stock, the Company granted certain registration rights under the Securities Act
to Lenfest pursuant to that certain Registration Rights Agreement dated as of
August 23, 2007 (the “2007 Registration Rights Agreement”).

 

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     D. In connection with the 2009 Purchase Agreement, the Company has agreed,
upon the terms and subject to the conditions contained therein, to issue to
Lenfest shares of Series D Convertible Preferred Stock of the Company, par value
$0.05 per share (the “Series D Preferred Stock”), which are convertible into
shares of the Common Stock, in payment of origination fees on the Credit
Facility and the Lender Guaranties and payment of interest on the Notes in the
event Lenfest elects to receive such interest in shares of Series D Preferred
Stock in lieu of cash, and to issue and sell to Lenfest warrants to acquire
shares of Common Stock (the “2009 Warrants”), all as provided and described in
the 2009 Purchase Agreement.
     E. In connection with the 2009 Purchase Agreement, the Company has agreed,
upon the terms and subject to the conditions contained therein, that upon the
occurrence of certain triggering events as specified in the 2009 Purchase
Agreement (the “Triggering Events”), the Series B Preferred Stock and the
Series C Preferred Stock will be exchanged automatically for, and the
Subordinated Notes will be converted into and exchanged for, shares of the
Company’s Series E Convertible Preferred Stock, par value $0.05 per share (the
“Series E Preferred Stock”), which are convertible into shares of the Common
Stock.
     F. To induce Lenfest to execute and deliver the 2009 Purchase Agreement,
the Company has agreed to amend and restate the 2003 Registration Rights
Agreement, the 2006 Registration Rights Agreement and the 2007 Registration
Rights Agreement to provide certain registration rights under the Securities Act
for the shares of Common Stock issuable upon (i) conversion of the Series D
Preferred Stock; (ii) (a) in the event the Triggering Events described in the
2009 Purchase Agreement do not occur, the Subordinated Notes, the Series B
Preferred Stock and the Series C Preferred Stock or (b) in the event the
Triggering Events described in the 2009 Purchase Agreement do occur, the shares
of Series E Preferred Stock that were issued in conversion of and exchange for
the Series B Preferred Stock and the Series C Preferred Stock and in conversion
of the Subordinated Notes; and (iii) exercise of the 2003 Warrants and the 2009
Warrants.
     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, intending to be legally bound
hereby, the Company and Lenfest hereby agree to amend and restate the 2003
Registration Rights Agreement, the 2006 Registration Rights Agreement and the
2007 Registration Rights Agreement in their entirety as follows:
     1. DEFINITIONS. As used in this Agreement, the following terms shall have
the following meanings:
          (a) “Investors” means Lenfest and any transferees or assignees who
agree to become bound by the provisions of this Agreement in accordance with
Section 9 hereof.
          (b) “register,” “registered,” and “registration” refer to a
registration effected by preparing and filing a Registration Statement or
Registration Statements in compliance with the Securities Act and pursuant to
Rule 415 under the Securities Act or any successor rule providing for offering
securities on a continuous basis (“Rule 415”), and the declaration or

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ordering of effectiveness of such Registration Statement by the United States
Securities and Exchange Commission (the “SEC”).
          (c) “Registrable Securities” means (i) the Common Stock issuable upon
conversion of the Subordinated Notes, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock and/or the Series E Preferred
Stock, as the case may be (collectively, the “Preferred Stock”); (ii) any Common
Stock issued or issuable upon exercise of the 2003 Warrants and/or the 2009
Warrants; and (iii) any Common Stock, or any Common Stock issued or issuable
(directly or indirectly) upon conversion and/or exercise of any other securities
of the Company, acquired by the Investors after the date hereof.
          (d) “Registration Statement” means a registration statement of the
Company under the Securities Act.
     2. REGISTRATION.
          (a) Demand Registration. Upon receipt of a written request (a “Demand
Request”) from Investors holding a majority of the Registrable Securities, which
Demand Request shall set forth the number of Registrable Securities the
Investors are seeking to have registered, the Company shall prepare and file
with the SEC as soon as practicable, but in no event later than sixty (60) days
from the date of its receipt of a Demand Request, a Registration Statement on
Form S-3 (or, if Form S-3 is not then available, on such form of Registration
Statement as is then available to effect a registration of all of the
Registrable Securities) covering the resale of the Registrable Securities which
are the subject of the Demand Request. The Registration Statement filed
hereunder, to the extent allowable under the Securities Act and the rules
promulgated thereunder (including Rule 416), shall state that such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable to prevent dilution resulting from stock splits,
stock dividends or similar transactions. The Investors shall not be entitled to
make more than six (6) Demand Requests pursuant to this Agreement; provided,
however, the Investors shall not be entitled to make more than two (2) Demand
Requests during any twelve (12) month period. A registration request pursuant to
this Section 2(a) shall not be deemed to have been effected and shall not be
considered a demand registration which may be requested pursuant to this Section
2(a) unless a registration statement filed pursuant to this Section 2(a) has
been declared effective by the SEC.
          (b) Piggy-Back Registrations. If at any time prior to the expiration
of the Registration Period (as hereinafter defined), the Company shall file with
the SEC a Registration Statement relating to an offering for its own account or
the account of others under the Securities Act of any of its equity securities
(other than the amendment of a registration statement now on file, registration
statements on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans), the Company shall send to each Investor written
notice of such filing and, if within fifteen (15) days after the receipt of such
notice, an Investor shall so request in writing, the Company shall include in
such Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering, the

3

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managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)’ judgment, marketing or other factors dictate
such limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not
contractually entitled to inclusion of such securities in such Registration
Statement or are not contractually entitled to pro rata inclusion with the
Registrable Securities; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having the
contractual right to include such securities in the Registration Statement other
than holders of securities contractually entitled to inclusion of their
securities in such Registration Statement by reason of demand registration
rights. If an offering in connection with which an Investor is entitled to
registration under this Section 2(b) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall offer and sell such Registrable Securities in an underwritten
offering using the same underwriter or underwriters and, subject to the
provisions of this Agreement, on the same terms and conditions as other shares
of Common Stock included in such underwritten offering.
          (c) Registrations on Form S-3. Upon receipt of a written request (an
“S-3 Request”) from Investors holding a majority of the Registrable Securities,
which S-3 Request shall set forth the number of Registrable Securities the
Investors are seeking to have registered, if the Company is eligible at the time
of such request to use Form S-3, the Company shall prepare and file with the SEC
as soon as practicable, but in no event later than sixty (60) days from the date
of its receipt of an S-3 Request, a Registration Statement on Form S-3 covering
the resale of the Registrable Securities which are the subject of the S-3
Request. The Registration Statement filed hereunder, to the extent allowable
under the Securities Act and the rules promulgated thereunder (including
Rule 416), shall state that such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become issuable
to prevent dilution resulting from stock splits, stock dividends or similar
transactions. The Investors shall not be entitled to make more than two (2) S-3
Requests during any twelve (12) month period.
     3. OBLIGATIONS OF THE COMPANY.
          In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
          (a) The Company shall prepare and file with the SEC the Registration
Statement in accordance with Section 2, and cause such Registration Statement
relating to Registrable Securities to become effective as soon as practicable
after such filing, and keep such Registration Statement effective pursuant to
Rule 415 at all times until such date as is the earlier of (i) the date on which
all of the Registrable Securities have been sold and (ii) the date on which

4

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all of the Registrable Securities (in the opinion of counsel to the Investors,
which shall be sought upon the request of the Company) may be immediately sold
to the public without registration or restriction pursuant to Rule 144(k) under
the Securities Act or any successor provision (the “Registration Period”), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein and all documents incorporated by reference
therein) shall 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 not misleading, and (iii) shall comply in all material
respects with the requirements of the Securities Act and the rules and
regulations of the SEC promulgated thereunder. The financial statements of the
Company included in the Registration Statement or incorporated by reference
therein will comply in all material respects with the applicable accounting
requirements and the published rules and regulations of the SEC applicable with
respect thereto. Such financial statements will be prepared in accordance with
U.S. generally accepted accounting principles, consistently applied, during the
periods involved (except in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed on summary statements)
and fairly present in all material respects the consolidated financial position
of the Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to immaterial year-end
adjustments).
          (b) The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until the earlier of (i) such time as all of such Registrable Securities have
been disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof as set forth in the Registration Statement or (ii) the
expiration of the Registration Period.
          (c) The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel
(i) promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC (including, without limitation, any request to
accelerate the effectiveness of the Registration Statement or amendment
thereto), and each item of correspondence from the SEC or the staff of the SEC,
in each case relating to the Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the Registration
Statement or any amendment thereto, a notice stating that the Registration
Statement or amendment has been declared effective, and (iii) such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.

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          (d) The Company shall (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
“blue sky” laws of such jurisdictions in the United States as each Investor who
holds Registrable Securities being offered reasonably requests, (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 (A) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (B) subject itself
to general taxation in any such jurisdiction, (C) file a general consent to
service of process in any such jurisdiction, (D) provide any undertakings that
cause the Company undue expense or burden, or (E) make any change in its charter
or bylaws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its shareholders.
          (e) As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and, promptly
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request.
          (f) The Company shall use reasonable best efforts (i) to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, and, if such an order is issued, to obtain the
withdrawal of such order at the earliest practicable moment (including in each
case by amending or supplementing such Registration Statement) and (ii) to
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance of
such order and the resolution thereof (and if such Registration Statement is
supplemented or amended, deliver such number of copies of such supplement or
amendment to each Investor as such Investor may reasonably request).
          (g) The Company shall permit a single firm of counsel designated by
the Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to its filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.
          (h) At the request of an Investor in the case of an underwritten
public offering, the Company shall furnish, on the date of effectiveness of the
Registration Statement (i) an opinion, dated as of such date, from counsel
representing the Company addressed to each Investor and in form, scope and
substance as is customarily given in an underwritten public offering and (ii) a
letter, dated such date, from the Company’s independent certified public

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accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and each Investor.
          (i) 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, (iv) such
information has been made generally available to the public other than by the
Company or disclosure in violation of this or any other agreement, or (v) such
Investor consents to the form and content of any such disclosure. 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 notice to such
Investor prior to making such disclosure, and allow the Investor, at its
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
          (j) The Company shall, prior to the declaration of effectiveness of
any registration statement covering Registrable Securities, cause all of the
Registrable Securities covered by the Registration Statement to be listed, at
its option, on any national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange.
          (k) The Company shall provide a transfer agent and registrar, which
may be a single entity, for the Registrable Securities.
          (l) The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within five
(5) business days after the Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
cause legal counsel selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement), an opinion of such
counsel in the form reasonably satisfactory to the transfer agent.
     4. OBLIGATIONS OF THE INVESTOR.
          In connection with the registration of the Registrable Securities,
each Investor shall have the following obligations:

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          (a) 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 shall
furnish to the Company such information regarding himself or itself, the
Registrable Securities held by him or it and the intended method of disposition
of the Registrable Securities held by him or it as shall be reasonably required
to effect the registration of such Registrable Securities and shall execute such
documents in connection with such registration as the Company may reasonably
request. At least ten (10) days prior to the anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor.
          (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 the Registration
Statement hereunder. The Company shall not be required to include in any
Registration Statement the Registrable Securities of any Investor who fails to
cooperate with the Company as reasonably requested in connection with the
preparation and filing of the 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(e) or
3(f), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor’s receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction at
the Company’s request) all copies in such Investor’s possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice.
          (d) No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor’s Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
customary questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under underwritten offerings
for selling shareholders, (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Section 5 below, and (iv) complies with all
applicable laws in connection therewith.
          (e) In the event that in the judgment of the Company, it is advisable
to suspend the use of a prospectus included in the Registration Statement due to
pending material developments or other events which have not yet been publicly
disclosed and as to which the Company believes public disclosure would be
detrimental to the Company, the Company shall notify each Investor to such
effect, and, upon receipt of such notice, each Investor shall immediately
discontinue any sales of Registrable Securities pursuant to the Registration
Statement until such Investor receives copies of a supplemental or amended
prospectus or until such Investor is advised in writing by the Company that the
then current prospectus may be used and have received copies of any additional
or supplemental filings that are incorporated or deemed incorporated by
reference in such prospectus (a “Disclosure Delay Period”).

8

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Notwithstanding the foregoing, there shall not be more than an aggregate of
ninety (90) days in any twelve (12) month period during which the Company is in
a Disclosure Delay Period.
     5. EXPENSES OF REGISTRATION. All reasonable expenses incurred by the
Company or the Investors in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3 above, including, without
limitation, all registration, listing and qualifications fees, printers and
accounting fees, and the reasonable fees and disbursements of counsel for the
Investors shall be borne by the Company.
     6. INDEMNIFICATION. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
          (a) To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees and agents of such
Investor and each person who controls any Investor within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), if any, (each, an “Indemnified Person”),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, “Claims”) to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated 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 light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange 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 (the matters in the foregoing clauses (i) through (iii) being,
collectively, “Violations”). The Company shall reimburse the Investors and each
other Indemnified Person, promptly as such expenses are incurred and are due and
payable, for any reasonable 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) shall not apply to a Claim arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
for use in the Registration Statement or any such amendment thereof or
supplement thereto. 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 any Investor
pursuant to Section 9 hereof.
          (b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and

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defend, to the same extent and in the same manner set forth in Section 6(a), the
Company, each of its directors, each of its officers who signs the Registration
Statement, its employees, agents and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and any other shareholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such shareholder within the meaning of the Securities Act or the
Exchange Act (collectively and together with an Indemnified Person, an
“Indemnified Party”), against any Claim to which any of them may become subject,
under the Securities Act, the Exchange Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement; and, subject
to Section 6(c), such Investor will reimburse any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) 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; provided, further, however, that the
Investor shall be liable in the aggregate to all Indemnified Parties under this
Agreement (including this Section 6(b) and Section 7) for only that amount as
does not exceed the net proceeds actually received by such Investor as a result
of the sale of Registrable Securities pursuant to such Registration Statement.
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
(including any governmental action), 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 such indemnifying party shall not be
entitled to assume such defense and an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses 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 conflicts of interest between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding or the actual or potential defendants in, or targets
of, any such action include both the Indemnified Person or the Indemnified Party
and the indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are in conflict with those
available to such indemnifying party. The indemnifying party shall pay for only
one separate legal counsel for the

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Indemnified Person or the Indemnified Parties, as applicable, and such legal
counsel shall be selected by Investors holding a majority-in-interest of the
Registrable Securities included in the Registration Statement to which the Claim
relates (with the approval of the initial Investor if it holds Registrable
Securities included in such Registration Statement), if the Investors are
entitled to indemnification hereunder, or by the Company, if the Company is
entitled to indemnification hereunder, as applicable. 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 actually prejudiced in its
ability to defend such action. 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 such expense, loss, damage or liability is
incurred and is due and payable.
     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 as is appropriate
to reflect the relative fault of the indemnifying party, on the one hand, and
the Indemnified Person or Indemnified Party, as the case may be, on the other
hand, with respect to the Violation giving rise to the applicable Claim;
provided, however, that (i) no contribution shall be made under circumstances
where the party would not have been liable for indemnification under the fault
standards set forth in Section 6, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any seller of Registrable Securities shall be limited in the aggregate amount to
the net amount of proceeds actually received by such seller from the sale of
such Registrable Securities.
     8. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to each
Investor the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit each
Investor to sell securities of the Company to the public without registration
(“Rule 144”), the Company agrees to:
          (a) use its best efforts to file with the SEC in a timely manner and
make and keep available all reports and other documents required of the Company
under the Securities Act and the Exchange Act so long as the Company remains
subject to such requirements and the filing and availability of such reports and
other documents is required for the applicable provisions of Rule 144; and
          (b) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit each
Investor to sell such securities under Rule 144 without registration.

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     9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the Investors
hereunder, including the right to have the Company register Registrable
Securities pursuant to this Agreement, shall be automatically assignable by each
Investor to any transferee of Registrable Securities or any assignee of the 2009
Purchase Agreement, the Series C Preferred Stock Purchase Agreement, the
Series B Preferred Stock Purchase Agreement and/or the 2003 Note and Warrant
Purchase Agreement, as the case may be, 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 promptly after such assignment, (ii) the
Company is 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, and (iii) the transferee
or assignee agrees in writing for the benefit of the Company to be bound by all
of the provisions contained herein.
     10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be
amended and the observance thereof may be waived only with written consent of
the Company and Investors who hold a majority-in-interest of the Registrable
Securities or, in the case of a waiver, with the written consent of the party
charged with the enforcement of any such provision.
     11. MISCELLANEOUS.
          (a) Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested), or delivered personally or by courier, or by confirmed telecopy, or
by a reputable overnight delivery service, and shall be effective upon receipt
or refusal of receipt, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966
Telephone: (215) 355-9100
Facsimile: (215) 357-4000
Attn: Chief Financial Officer

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with a copy simultaneously transmitted by like means to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 South Broad Street
Philadelphia, PA 19102
Telephone: (215) 569-4281
Facsimile: (215) 568-6603
Attn: William W. Matthews, III, Esquire
               and if to any Investor, at such address as such Investor shall
have provided in writing to the Company, or at such other address as each such
party furnishes by notice given in accordance with this Section 11(a).
with a copy simultaneously transmitted by like means to:
Royer & Associates, LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406
Attn: John E. Royer, Jr., Esq.
Facsimile: (610) 354-8896
          (b) 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.
          (c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania applicable to contracts made
and to be performed in the Commonwealth of Pennsylvania. The Company and each
Investor irrevocably consent to the exclusive jurisdiction of the United States
federal courts and the state courts located in Montgomery County, Commonwealth
of Pennsylvania, in any suit or proceeding based on or arising under this
Agreement and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in such courts. The Company and each Investor
irrevocably waive the defense of an inconvenient forum to the maintenance of
such suit or proceeding. The parties further agree that service of process upon
the other party, mailed by first class mail shall be deemed in every respect
effective service of process upon such party in any such suit or proceeding.
Nothing herein shall affect the parties’ right to serve process in any other
manner permitted by law. Each party agrees that a final non-appealable judgment
in any such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
          (d) This Agreement, the 2009 Purchase Agreement, the Series C
Preferred Stock Purchase Agreement, the Series B Preferred Stock Purchase
Agreement and the 2003 Note and Warrant Purchase Agreement 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
supersedes all prior agreements and understandings between the parties hereto
with respect to the

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subject matter hereof and thereof, including, without limitation, the 2007
Registration Rights Agreement, the 2006 Registration Rights Agreement and the
2003 Registration Rights Agreement.
          (e) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
          (f) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
          (g) This Agreement may be executed in two or more 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.
          (h) 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 the 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.
          (i) All consents, approvals and other determinations to be made by the
Investors pursuant to this Agreement shall be made by the Investors holding a
majority-in-interest of the Registrable Securities held by all Investors.
          (j) Each party to this Agreement has participated in the negotiation
and drafting of this Agreement. As such, the language used herein shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party to
this Agreement.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Registration Rights Agreement to be duly executed as of the date first above
written.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:                          H. F.
Lenfest             

[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]

 

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EXHIBIT G
FORM OF GUARANTY AGREEMENT
GUARANTY
     THIS GUARANTY (this “Guaranty”), dated as of April 24, 2009, is made by
ENTERTAINMENT TECHNOLOGY CORPORATION, a Pennsylvania corporation, and each other
subsidiary of the Borrower (as hereinafter defined) that at any time hereafter
is formed, created or acquired, or has any assets or operations if formed prior
to the date hereof, and their respective successors and permitted assigns
(collectively, the “Guarantors”), in favor of H.F. LENFEST (the “Lender”).
WITNESSETH
     WHEREAS, Environmental Tectonics Corporation (the “Borrower”) and the
Lender are parties to a Secured Credit Facility and Warrant Purchase Agreement,
dated as of the date hereof (as amended, supplemented or otherwise modified from
time to time, the “Purchase Agreement”);
     WHEREAS, the Purchase Agreement provides that, as a condition precedent to
the making of one or more advances thereunder by the Lender to the Borrower (the
“Credit Facility”), the Guarantors must execute a guaranty in favor of the
Lender;
     WHEREAS, the Guarantors will derive substantial benefits from the Purchase
Agreement and the Credit Facility; and
     WHEREAS, the rights granted to the Lender herein shall be subject to the
terms and conditions of the Subordination Agreement (as defined in the Purchase
Agreement).
     NOW, THEREFORE, in consideration of the premises and to induce the Lender
to provide the Credit Facility, the Guarantors, intending to be legally bound,
hereby agree with the Lender as follows:
     1. Defined Terms. Capitalized terms which are not defined herein have the
meaning given to such terms in the Purchase Agreement. As used herein,
“Obligations” shall mean the unpaid principal of (which such term shall include
any payments of principal the Lender is compelled to surrender or disgorge) and
interest on (including, without limitation, interest accruing after the maturity
of the Credit Facility and interest accruing after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) the Credit Facility, and
all other obligations and liabilities of the Borrower to the Lender whether
direct or indirect, absolute or contingent, liquidated or unliquidated, due or
to become due, or now existing or hereafter incurred, which may arise under, out
of, or in connection with, the Purchase Agreement, the Notes, the other
Transaction Documents and any other document made, delivered or given in
connection therewith or herewith, whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses (including,
without limitation, all fees and disbursements of

1

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counsel to the Lender that are required to be paid by the Borrower pursuant to
the terms of the Purchase Agreement or any other Transaction Document) or
otherwise.
     2. Guaranty. This is a Guaranty of payment and not of collectability. The
Guarantors hereby jointly and severally, unconditionally and irrevocably
guarantee to the Lender, the prompt and complete payment and performance by the
Borrower when due (whether at the stated maturity, by acceleration or otherwise)
of the Obligations. The Guarantors further agree to pay any and all reasonable
expenses (including, without limitation, all reasonable fees and disbursements
of counsel), which may be paid or incurred by the Lender in enforcing, or
obtaining advice of counsel in respect of, any of its rights under this
Guaranty. This Guaranty shall remain in full force and effect until the
Obligations are paid in full and the Credit Facility is terminated,
notwithstanding that from time to time prior thereto the Borrower may be free
from any Obligations.
     The Guarantors agree that whenever, at any time or from time to time,
either shall make any payment to the Lender on account of its liability
hereunder, it will notify the Lender in writing that such payment is made under
this Guaranty for such purpose. No payment or payments made by the Borrower or
any other Person or received or collected by the Lender from the Borrower or any
other Person by virtue of any action or proceeding or any set-off or
appropriation or application, at any time or from time to time, in reduction of
or in payment of the Obligations shall be deemed to modify, reduce, release or
otherwise affect the liability of the Guarantors hereunder which liability
shall, notwithstanding any such payment or payments, remain in full force and
effect until the Obligations are paid in full and the Credit Facility is
terminated.
     3. Right of Set-off. Upon the occurrence and during the continuance of any
Event of Default, the Lender is hereby irrevocably authorized at any time and
from time to time, without notice to the Guarantors, any such notice being
hereby waived by the Guarantors, to set off and appropriate and apply any and
all deposits (general or special, time or demand, provisional or final), and any
other credits, indebtedness or claims, in each case whether direct or indirect,
absolute or contingent, matured or unmatured, at any time held or owing by the
Lender to or for the credit or the account of the Guarantors, in such amounts as
the Lender may elect, on account of the liabilities of the Guarantors hereunder
and claims of every nature and description of the Lender against the Guarantors,
whether arising hereunder, under the Purchase Agreement, the Notes, or
otherwise, as the Lender may elect, whether or not the Lender has made any
demand for payment and although such liabilities and claims may be contingent or
unmatured. The Lender shall notify the Guarantors promptly of any such set-off
made by it and the application made by it of the proceeds thereof, provided that
the failure to give such notice shall not affect the validity of such set-off
and application. The rights of the Lender under this Section 3 are in addition
to other rights and remedies (including, without limitation, other rights of
set-off), which the Lender may have.
     4. No Subrogation. Notwithstanding any payment or payments made by the
Guarantors hereunder, or any set-off or application of funds of the Guarantors
by the Lender, the Guarantors shall not be entitled to be subrogated to any of
the rights of the Lender against the Borrower or against any collateral security
or guaranty or right of offset held by the Lender for the payment of the
Obligations, nor shall the Guarantors seek any reimbursement or indemnification
from the Borrower in respect of payments made by the Guarantors

2

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hereunder, until all amounts owing to the Lender by the Borrower on account of
the Obligations are paid in full and the Credit Facility is terminated. If any
amount shall be paid to the Guarantors on account of such subrogation or other
rights at any time when all of the Obligations shall not have been paid in full,
such amount shall be held by the Guarantors in trust for the Lender segregated
from other assets of the Guarantors, and shall forthwith upon receipt by the
Guarantors, be turned over to the Lender in the exact form received by the
Guarantors (duly indorsed by the Guarantors to the Lender, if required), to be
applied against the Obligations, whether matured or unmatured, in such order as
the Lender may determine.
     5. No Marshalling. Lender has no obligation to marshal any assets in favor
of either Guarantor, or against or in payment of (i) the Notes, or (ii) any
other obligation owed to Lender by Borrower or either Guarantor.
     6. Waivers; Amendments, etc. with respect to the Obligations. Each
Guarantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against each Guarantor, and without notice to or further
assent by each Guarantor, any demand for payment of any of the Obligations made
by the Lender may be rescinded by the Lender, and any of the Obligations
continued, and the Obligations, the liability of any other party upon or for any
part thereof, or any collateral security or guaranty therefor or right of offset
with respect thereto may from time to time, in whole or in part, be renewed,
extended, amended, modified, accelerated, compromised, waived, surrendered or
released by the Lender, and the Purchase Agreement, the Notes, the other
Transaction Documents and any other documents executed and delivered in
connection therewith may be amended, modified, supplemented or terminated, in
whole or in part, as the Lender may deem advisable from time to time, and any
collateral security, guaranty or right of offset at any time held by the Lender
for the payment of the Obligations may, be sold, exchanged, waived, surrendered
or released. The Lender shall not have any obligation to protect, secure,
perfect or insure any lien at any time held by it as security for the
Obligations or for this Guaranty or any property subject thereto.
     7. Guaranty Absolute and Unconditional. Each Guarantor waives any and all
notice of the creation, renewal, extension or accrual of any of the Obligations
and notice of or proof of reliance by the Lender upon this Guaranty or
acceptance of this Guaranty; the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred in reliance
upon this Guaranty; and all dealings between the Borrower or the Guarantors, on
the one hand, and the Lender, on the other, shall likewise be conclusively
presumed to have been had or consummated in reliance upon this Guaranty, waives
notice of acceptance of this Guaranty, notice of extensions of credit to the
Borrower from time to time, notice of default, diligence, presentment, notice of
dishonor, protest and demand for payment. This Guaranty is and shall be
construed as a continuing, absolute and unconditional Guaranty of payment
without regard to (a) the validity or enforceability of the Purchase Agreement,
the Notes, any of the other Transaction Documents, any of the Obligations or any
collateral security therefor or guaranty or right of offset with respect thereto
at any time or from time to time held by or for the benefit of the Lender,
(b) any defense, set-off or counterclaim (other than a defense of payment or
performance) which may at any time be available to or be asserted by the
Borrower against the Lender, or (c) any other circumstance whatsoever (with or
without notice to or knowledge of the Borrower or the Guarantors) which
constitutes, or

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might be construed to constitute, an equitable or legal discharge of the
Borrower for the Obligations, or of the Guarantors under this Guaranty, in
bankruptcy or in any other instance. This Guaranty is intended to be a surety of
each Guarantor on behalf of Lender. When the Lender is pursuing its rights and
remedies hereunder against the Guarantors, the Lender may, but shall be under no
obligation to, pursue such rights and remedies as it may have against the
Borrower or any other Person or against any collateral security or guaranty for
the Obligations or any right of offset with respect thereto, and any failure by
the Lender to pursue such other rights or remedies or to collect any payments
from the Borrower or any such other Person or to realize upon such collateral
security or guaranty or to exercise any such right of offset, or any release of
the Borrower or any such other Person or of any such collateral security,
Guaranty or right of offset, shall not relieve the Guarantors of any joint and
several liability hereunder, and shall not impair or affect the rights and
remedies, whether express, implied or available as a matter of law, of the
Lender against the Guarantors.
     8. Reinstatement. This Guaranty shall continue to be effective, or be
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
the Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Borrower or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for the
Borrower or any substantial part of its property, or for any other reason, all
as though such payments had not been made.
     9. Payments. Each Guarantor hereby agrees that the Obligations will be paid
to the order of the Lender without set-off or counterclaim in United States
dollars in immediately available funds at the office of the Lender set forth in
Section 14 hereof.
     10. POWER TO CONFESS JUDGMENT. THIS SECTION 10 SETS FORTH A WARRANT OF
AUTHORITY FOR ANY ATTORNEY TO CONFESS JUDGMENT AGAINST THE UNDERSIGNED
GUARANTORS. IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE
UNDERSIGNED GUARANTORS, THE UNDERSIGNED GUARANTORS, FOLLOWING CONSULTATION WITH
SEPARATE COUNSEL FOR THE UNDERSIGNED GUARANTORS AND WITH KNOWLEDGE OF THE LEGAL
EFFECT HEREOF, HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY AND UNCONDITIONALLY
WAIVE ANY AND ALL RIGHTS THE UNDERSIGNED GUARANTORS HAVE OR MAY HAVE TO PRIOR
NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND
LAWS OF THE UNITED STATES OF AMERICA, THE COMMONWEALTH OF PENNSYLVANIA, THE
STATE OF DELAWARE, OR ELSEWHERE.
     EACH GUARANTOR HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF
RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR SUCH GUARANTOR AT ANY TIME OR TIMES,
AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, IN ANY SUCH COURT IN ANY
ACTION BROUGHT AGAINST SUCH GUARANTOR BY THE LENDER WITH RESPECT TO THE
AGGREGATE AMOUNTS PAYABLE HEREUNDER, WITH OR WITHOUT DECLARATION FILED, AS OF
ANY TERM,

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AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST SUCH GUARANTOR FOR ALL SUMS
PAYABLE BY SUCH GUARANTOR TO THE LENDER HEREUNDER, AS EVIDENCED BY AN AFFIDAVIT
SIGNED BY A DULY AUTHORIZED DESIGNEE OF THE LENDER SETTING FORTH SUCH AMOUNT
THEN DUE FROM SUCH GUARANTOR TO THE LENDER, PLUS AN ATTORNEY’S COMMISSION EQUAL
TO TEN PERCENT (10%) OF THE SUMS THEN OUTSTANDING HEREUNDER, BUT IN NO EVENT
LESS THAN $25,000, WITH COSTS OF SUIT, RELEASE OF PROCEDURAL ERRORS, OTHER THAN
NOTICES THAT MAY BE REQUIRED HEREUNDER, AND WITHOUT RIGHT OF APPEAL. IF A COPY
OF THIS GUARANTY SHALL HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY
TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. EACH GUARANTOR WAIVES THE RIGHT
TO ANY STAY OF EXECUTION, THE BENEFIT OF ALL EXEMPTION LAWS NOW OR HEREAFTER IN
EFFECT AND ANY AND ALL RIGHTS TO PRIOR NOTICE AND HEARING WITH RESPECT TO THE
GARNISHMENT OR ATTACHMENT OF ANY PROPERTY PURSUANT TO A JUDGMENT ENTERED
HEREUNDER. NO SINGLE EXERCISE OF THE FOREGOING WARRANT AND POWER TO BRING ANY
ACTION OR CONFESS JUDGMENT THEREIN SHALL BE DEEMED TO EXHAUST THE POWER, BUT THE
POWER SHALL CONTINUE UNDIMINISHED AND MAY BE EXERCISED FROM TIME TO TIME AS
OFTEN AS THE LENDER SHALL ELECT UNTIL ALL AMOUNTS PAYABLE TO THE LENDER
HEREUNDER, SHALL HAVE BEEN PAID IN FULL. THE EXERCISE BY THE LENDER OF HIS
RIGHTS AND REMEDIES AND THE ENTRY OF ANY JUDGMENT BY THE LENDER UNDER THIS
SECTION SHALL NOT AFFECT IN ANY WAY THE INTEREST RATE PAYABLE HEREUNDER OR ANY
OTHER AMOUNTS DUE TO THE LENDER, BUT INTEREST SHALL CONTINUE TO ACCRUE ON SUCH
AMOUNTS AT THE DEFAULT RATE (AS DEFINED IN THE NOTES).
     11. Severability. Any provision of this Guaranty which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
     12. Paragraph Headings. The paragraph headings used in this Guaranty are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
     13. No Waiver; Cumulative Remedies. The Lender shall not by any act (except
by a written instrument pursuant to Section 14 hereof), delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Lender, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Lender of any right or remedy

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hereunder on anyone occasion shall not be construed as a bar to any right or
remedy which the Lender would otherwise have on any future occasion. The rights
and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
     14. Waivers and Amendments: Successors and Assigns; Governing Law. None of
the terms or provisions of this Guaranty may be waived, amended, supplemented or
otherwise modified except by a written instrument executed by the Guarantors and
the Lender. This Guaranty shall be binding upon the successors and assigns of
the Guarantors and shall inure to the benefit of the Lender and its successors
and assigns. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE SUBSTANTIVE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA.
     15. Additional Guarantors; Representations and Warranties. If at any time
subsequent to the date hereof any other Subsidiary of the Borrower becomes a
party to this Guaranty (an “Additional Guarantor”) as provided in
Section 4.1(e)(iii) of the Purchase Agreement by executing a joinder hereto, the
obligations of such Additional Guarantor and any other Guarantor hereunder shall
be joint and several and all references herein to the Guarantors shall include
such Additional Guarantor. The Borrower represents and warrants that as of the
date of this Guaranty, ETC Delaware, Inc., a Delaware corporation and Subsidiary
of the Borrower, conducts no business and has no operations or assets.
     16. Notices. All notices, requests and demands to or upon the respective
parties hereto to be effective shall be in writing (including by facsimile),
and, unless otherwise expressly provided herein, shall be deemed to have been
duly given or made when delivered by hand, or three days after being deposited
in the mail, postage prepaid, or, in the case of facsimile notice, when sent
during normal business hours with electronic confirmation or otherwise when
received, addressed as set forth below for the Lender and as set forth on the
signature page hereto for each Guarantor:

     
Lender:
  c/o The Lenfest Group
 
  300 Barr Harbor Drive, Suite 460
 
  West Conshohocken, PA 19428
 
  Attn: H.F. Lenfest
 
   
 
  With a copy to:
 
   
 
  Royer & Associates, LLC
 
  681 Moore Road, Suite 321
 
  King of Prussia, PA 19406
 
  Attention: John E. Royer, Jr., Esq.

     17. Submission to Jurisdiction; Waivers.
          (a) Each Guarantor hereby irrevocably and unconditionally:
          (i) submits for itself and its property in any legal action or
proceeding relating to this Guaranty or the other Transaction Documents, or for

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recognition and enforcement of any judgment in respect thereof to the
non-exclusive general jurisdiction of the courts of the Commonwealth of
Pennsylvania, the courts of the United States of America for the Eastern
District of Pennsylvania, and appellate courts from any thereof;
          (ii) consents that any such action or proceeding may be brought in
such courts, and waives to the extent permitted by applicable law any objection
that it may now or hereafter have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court and agree not to plead or claim the same;
          (iii) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to it at its address
set forth on the signature page hereto or at such other address of which the
Lender shall have been notified;
          (iv) waives and hereby acknowledges that it is estopped from raising
any objection based on forum non conveniens, any claim that any of the
above-referenced courts lack proper venue or any objection that any of such
courts lack personal jurisdiction over it so as to prohibit such courts from
adjudicating any issues raised in a complaint filed with such courts against
such Guarantor this Guaranty or the other Transaction Documents;
          (v) acknowledges and agree that the choice of forum contained in this
Section 16 shall not be deemed to preclude the enforcement of any judgment
obtained in any forum or the taking of any action under this Guaranty or any
other Transaction Documents to enforce the same in any appropriate jurisdiction;
          (vi) waives, to the maximum extent not prohibited by law, any right it
may have to claim or recover in any legal action or proceeding referred to in
this subsection any special, exemplary, punitive or consequential damages; and
          (vii) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
          (b) Each Guarantor hereby unconditionally waives trial by jury in any
legal action or proceeding relating to this Guaranty or any other Transaction
Document and for any mandatory counterclaim therein, including without
limitation any action or proceeding referred to in paragraph (a) above.
     Each Guarantor acknowledges that it has read and understood all the
provisions of this Guaranty, including the waiver of jury trial and confession
of judgment, and has been advised by counsel as necessary or appropriate.
[Signature Page Follows]

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     IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.

            ENTERTAINMENT TECHNOLOGY CORPORATION
      By:           Name:           Title:        

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EXHIBIT H
FORM OF MORTGAGE
AMENDED AND RESTATED OPEN-END MORTGAGE AND SECURITY
AGREEMENT
(This Mortgage Secures Future Advances)
     THIS AMENDED AND RESTATED OPEN-END MORTGAGE AND SECURITY AGREEMENT (this
“Mortgage”) is made as of the 24th day of April, 2009, by ENVIRONMENTAL
TECTONICS CORPORATION, a Pennsylvania corporation with an address at 125 James
Way, Southampton, Pennsylvania 18966 (“Mortgagor”), in favor of H.F. LENFEST, an
individual with an address at c/o The Lenfest Group, 300 Barr Harbor Drive,
Suite 460, West Conshohocken, Pennsylvania 19428 (“Mortgagee”).
     WHEREAS, Mortgagor is the owner of a certain tract or parcel of land
described in Exhibit A attached hereto and made a part hereof, together with the
improvements now or hereafter erected thereon;
     WHEREAS, Mortgagee executed that certain Senior Subordinated Convertible
Note dated as of February 18, 2003 (the “2003 Note”) in favor of Mortgagee in
the original principal amount of Ten Million Dollars ($10,000,000) (the “2003
Loan”), which 2003 Note was secured, in part, by that certain Open-End Mortgage
and Security Agreement made by Mortgagor in favor of Mortgagee dated
February 18, 2003 and recorded in the Office of the Recorder of Deeds in and for
Bucks County, Pennsylvania, on February 23, 2003 in Book 3148, page 1444 (the
“2003 Mortgage”);
     WHEREAS, pursuant to the terms of that certain Secured Promissory Note
dated February 20, 2009 (the “2009 Bridge Note”), Mortgagee extended to
Mortgagor an additional loan in the original principal amount of Two Million
Dollars ($2,000,000) (the “Bridge Loan”);
     WHEREAS, pursuant to the terms of that certain Secured Credit Facility and
Warrant Purchase Agreement, dated as of the date hereof, between Mortgagor and
Mortgagee (the “Credit Facility Agreement”), Mortgagor has agreed to extend to
Mortgagee a loan in the aggregate principal amount of up to Seven Million Five
Hundred Thousand Dollars ($7,500,000) (including the principal amount of the
2009 Bridge Note) (the “Credit Facility”), which Credit Facility is intended to
be secured by this Mortgage;
     WHEREAS, pursuant to the terms and subject to the conditions of the Credit
Facility Agreement, Mortgagee has agreed to personally guarantee the repayment
by Mortgagor of the maximum principal amount of up to Twenty Million Dollars
($20,000,000) (the “Personal Guaranty”) as may be payable by Mortgagor to PNC
Bank, National Association (“Senior Lender”) in, and pursuant to the terms of, a
Letter Agreement relating to a $20,000,000 committed line of credit to be
entered into by and between Mortgagor and Senior Lender (the “Senior Credit
Agreement”), in accordance with the terms of that certain letter agreement by
and between Mortgagor and Senior Lender dated the date hereof; and

 

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     WHEREAS, Mortgagor and Mortgagee desire to amend and restate in its
entirety the 2003 Mortgage in order to secure all of the obligations of
Mortgagor to Mortgagee under the Credit Facility Agreement.
     NOW, THEREFORE, for the purpose of securing the payment and performance of
the following obligations (collectively called the “Obligations”):
     (A) Any amounts due under the 2003 Note, the 2009 Bridge Note, all notes
now or hereafter executed by Mortgagor to memorialize an advance under the
Credit Facility or pursuant to the terms of the Credit Facility Agreement and
all sums paid by Mortgagee under the Personal Guaranty (including any interest
accruing thereon before or after maturity, or after the filing of any petition
in bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding relating to Mortgagor, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding), and any amendments,
extensions, renewals or increases and all reasonable costs and expenses of
Mortgagee incurred in the documentation, negotiation, modification, enforcement,
collection or otherwise in connection with any of the foregoing, including
reasonable attorneys’ fees and expenses; and
     (B) Any sums advanced by Mortgagee or which may otherwise become due
pursuant to the provisions of the Credit Facility Agreement, the Personal
Guaranty, the 2003 Note, the 2009 Bridge Note or this Mortgage or pursuant to
any other document or instrument at any time delivered to Mortgagee to evidence
or secure any of the Obligations or which otherwise relate to any of the
Obligations (as the same may be amended, supplemented or replaced from time to
time, the “Loan Documents”).
     Mortgagor, for good and valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound hereby, does hereby give, grant,
bargain, sell, convey, assign, transfer, mortgage, hypothecate, pledge, set over
and confirm unto Mortgagee and does agree that Mortgagee shall have a security
interest in the following described property, all accessions and additions
thereto, all substitutions therefor and replacements and proceeds thereof, and
all reversions and remainders of such property now owned or held or hereafter
acquired (the “Property”), to wit:
          (a) All of Mortgagor’s estate in the premises described in Exhibit A,
together with all of the easements, rights of way, privileges, liberties,
hereditaments, gores, streets, alleys, passages, ways, waters, watercourses,
rights and appurtenances thereunto belonging or appertaining, and all of
Mortgagor’s estate, right, title, interest, claim and demand therein and in the
public streets and ways adjacent thereto, either in law or in equity (the
“Land”);
          (b) All the buildings, structures and improvements of every kind and
description now or hereafter erected or placed on the Land, and all facilities,
fixtures, machinery, apparatus, appliances, installations, machinery and
equipment, including all building materials to be incorporated into such
buildings, all electrical equipment necessary for the operation of such
buildings and heating, air conditioning and plumbing equipment now or hereafter
attached to, located in or used in connection with those buildings, structures
or other improvements (the “Improvements”);

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          (c) All rents, issues and profits arising or issuing from the Land and
the Improvements (the “Rents”) including the Rents arising or issuing from all
leases and subleases now or hereafter entered into covering all or any part of
the Land and Improvements (the “Leases”), all of which Leases and Rents are
hereby assigned to Mortgagee by Mortgagor. The foregoing assignment shall
include all cash or securities deposited under Leases to secure performance of
lessees of their obligations thereunder, whether such cash or securities are to
be held until the expiration of the terms of such leases or applied to one or
more installments of rent coming due prior to the expiration of such terms. The
foregoing assignment extends to Rents arising both before and after the
commencement by or against Mortgagor of any case or proceeding under any Federal
or State bankruptcy, insolvency or similar law, and is intended as an absolute
assignment and not merely the granting of a security interest. Mortgagor,
however, shall have a license to collect, retain and use the Rents so long as no
Event of Default shall have occurred and be continuing or shall exist. Mortgagor
will execute and deliver to Mortgagee, on demand, such additional assignments
and instruments as Mortgagee may require to implement, confirm, maintain and
continue the assignment of Rents hereunder;
          (d) All proceeds of the conversion, voluntary or involuntary, of any
of the foregoing into cash or liquidated claims;
          (e) And without limiting any of the other provisions of this Mortgage,
Mortgagor, as debtor, expressly grants unto Mortgagee, as secured party, a
security interest in all those portions of the Property which may be subject to
the Uniform Commercial Code provisions applicable to secured transactions under
the laws of the state in which the Property is located (the “UCC”), and
Mortgagor will execute and deliver to Mortgagee on demand such financing
statements and other instruments as Mortgagee may require in order to perfect
and maintain such security interest under the UCC on the aforesaid collateral.
     To have and to hold the same unto Mortgagee, its successors and assigns,
forever, under and subject to the terms of the Senior Credit Agreement and
related documents (collectively, the “Senior Credit Documents”). All of the
duties and obligations of Mortgagor and the rights and remedies of Mortgagee
hereunder are under and subject in all respects to performance of the duties and
obligations of Mortgagor to Senior Lender and to the rights and remedies of
Senior Lender under the Senior Credit Documents. The failure by Mortgagor to
perform or comply with any of the provisions of this Mortgage shall not be an
Event of Default hereunder if such failure arises solely from Mortgagor’s
performance or compliance with comparable obligations under the Senior Credit
Documents and performance or compliance with both the Senior Credit Documents
and this Mortgage is impossible.
     Provided, however, that if Mortgagor shall pay to Mortgagee the
Obligations, and if Mortgagor shall keep and perform each of its other
covenants, conditions and agreements set forth herein and in the other Loan
Documents, then, upon the termination of all obligations, duties and commitments
of Mortgagor under the Obligations and this Mortgage, and subject to the
provisions of the paragraph entitled “Survival; Successors and Assigns”, the
estate hereby granted and conveyed shall become null and void.
     This Mortgage is an “Open-End Mortgage” as set forth in 42 Pa. C.S.A. §8143
and secures obligations up to a maximum principal amount of Thirty-Seven Million
Five Hundred

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Thousand Dollars ($37,500,000), plus accrued and unpaid interest outstanding at
any time under the Loan Documents, including advances for the payment of taxes
and municipal assessments, maintenance charges, insurance premiums, costs
incurred for the protection of the Property or the lien of this Mortgage,
expenses incurred by Mortgagee by reason of default by Mortgagor under this
Mortgage and advances for construction, alteration or renovation on the Property
or for any other purpose, together with all other sums due hereunder or secured
hereby. All notices to be given to Mortgagee pursuant to 42 Pa. C.S.A. §8143
shall be given as set forth in Section 18.
     1. Representations and Warranties. Mortgagor represents and warrants to
Mortgagee that Mortgagor has good and marketable title to an estate in fee
simple absolute in the Land and Improvements and has all right, title and
interest in all other property constituting a part of the Property, in each case
free and clear of all liens and encumbrances, except as may otherwise be set
forth on an Exhibit B hereto. This Mortgage is a valid and enforceable lien on
the Property (except as set forth on Exhibit B). Mortgagor shall preserve such
title as it warrants herein and the validity and priority of the lien hereof and
shall forever warrant and defend the same to Mortgagee against the claims of all
persons claiming by, through or under Mortgagor.
     2. Affirmative Covenants. Until all of the Obligations shall have been
fully paid, satisfied and discharged Mortgagor shall:
          (a) Payment and Performance of Obligations. Pay or cause to be paid
and perform all Obligations when due as provided in the Loan Documents.
          (b) Legal Requirements. Promptly comply with and conform in all
material respects to all present and future laws, statutes, codes, ordinances,
orders and regulations and all covenants, restrictions and conditions which may
be applicable to Mortgagor or to any of the Property (the “Legal Requirements”).
          (c) Impositions. Before interest or penalties are due thereon and
otherwise when due, Mortgagor shall pay all taxes of every kind and nature, all
charges for any easement or agreement maintained for the benefit of any of the
Property, all general and special assessments (including any condominium or
planned unit development assessments, if any), levies, permits, inspection and
license fees, all water and sewer rents and charges, and all other charges and
liens, whether of a like or different nature, imposed upon or assessed against
Mortgagor or any of the Property (the “Impositions”) unless the amount thereof
is being contested in good faith by Mortgagor by appropriate proceedings with
adequate reserves made for the payment thereof. Within thirty (30) days after
the payment of any Imposition if requested by Mortgagee, Mortgagor shall deliver
to Mortgagee evidence acceptable to Mortgagee of such payment. Mortgagor’s
obligations to pay the Impositions shall survive Mortgagee’s taking title to the
Property through foreclosure, deed-in-lieu or otherwise.
          (d) Maintenance of Security. Use, and permit others to use, the
Property only for its present use or such other uses as permitted by applicable
Legal Requirements and approved in writing by Mortgagee. Mortgagor shall keep
the Property in good condition and order and in a rentable and tenantable state
of repair and will make or cause to be made, as and when necessary, all repairs,
renewals, and replacements, structural and nonstructural, exterior

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and interior, foreseen and unforeseen, ordinary and extraordinary, provided,
however, that no structural repairs, renewals or replacements in excess of
$100,000 shall be made without Mortgagee’s prior written consent, not to be
unreasonably withheld, conditioned or delayed. Mortgagor shall not remove,
demolish or alter any material portion of the Property or any of the Property in
a manner that materially adversely affects the same, nor commit or suffer waste
with respect thereto, nor permit the Property to become deserted or abandoned.
Mortgagor covenants and agrees not to take or permit any action with respect to
the Property which will in any manner materially impair the security of this
Mortgage.
     3. Leases. Except as permitted by the Loan Documents, Mortgagor shall not
(a) execute an assignment or pledge of the Rents or the Leases other than in
favor of Mortgagee; (b) accept any prepayment of an installment of any Rents
more than 30 days prior to the due date of such installment; or (c) enter into
or amend any of the terms of any of the Leases without Mortgagee’s prior written
consent, not to be unreasonably withheld, conditioned or delayed. Any or all
leases or subleases of all or any part of the Property shall be subject in all
respects to Mortgagee’s prior written consent, not to be unreasonably withheld,
conditioned or delayed, shall be subordinated to this Mortgage and to
Mortgagee’s rights and, together with any and all rents, issues or profits
relating thereto, shall be assigned at the time of execution to Mortgagee as
additional collateral security for the Obligations, all in such form, substance
and detail as is satisfactory to Mortgagee in its reasonable discretion.
     4. Due on Sale Clause. Mortgagor shall not sell, convey or otherwise
transfer any interest in the Property (whether voluntarily or by operation of
law), or agree to do so, without Mortgagee’s prior written consent, including
(a) any sale, conveyance, assignment, or other transfer of (including
installment land sale contracts), or the grant of a security interest in, all or
any part of the legal or equitable title to the Property, except as otherwise
permitted hereunder; or (b) any lease of all or any portion of the Property. Any
default under this Section shall cause an immediate acceleration of the
Obligations without any demand by Mortgagee.
     5. Insurance. Mortgagor shall keep the Improvements continuously insured,
in an amount not less than the cost to replace the Improvements or an amount not
less than eighty percent (80%) of the full insurable value of the Property,
whichever is greater, against loss or damage by fire, with extended coverage and
against other hazards as Mortgagee may from time to time require. With respect
to any property under construction or reconstruction, Mortgagor shall maintain
builder’s risk insurance. Mortgagor shall also maintain comprehensive general
public liability insurance, in an amount of not less than One Million Dollars
($1,000,000) per occurrence and Two Million Dollars ($2,000,000) general
aggregate per location, which includes contractual liability insurance for
Mortgagor’s obligations under the Leases, and worker’s compensation insurance.
All property and builder’s risk insurance shall include protection for
continuation of income for a period of twelve (12) months, in the event of any
damage caused by the perils referred to above. All policies, including policies
for any amounts carried in excess of the required minimum and policies not
specifically required by Mortgagee, shall be with an insurance company or
companies satisfactory to Mortgagee, shall be in form satisfactory to Mortgagee,
shall meet all coinsurance requirements of Mortgagee, shall be maintained in
full force and effect, with premiums satisfied as collateral security for
payment of the Obligations, shall be endorsed with a standard mortgagee clause
in favor of Mortgagee and shall provide for at least thirty (30) days notice of
cancellation to Mortgagee. Such insurance

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shall also name Mortgagee as an additional insured under the comprehensive
general public liability policy and Mortgagor shall also deliver to Mortgagee a
copy of the replacement cost coverage endorsement. If the Property is located in
an area which has been identified by any governmental agency, authority or body
as a flood hazard area or the like, then Mortgagor shall maintain a flood
insurance policy covering the Improvements in an amount not less than the
appraised value of the Property or the maximum limit of coverage available under
the federal program, whichever amount is less.
     6. Rights of Mortgagee to Insurance Proceeds. In the event of loss,
Mortgagee shall have the exclusive right to adjust, collect and compromise all
Material Insurance Claims (as defined below), and Mortgagor shall not adjust,
collect or compromise any Material Insurance Claims under said policies without
Mortgagee’s prior written consent, not to be unreasonably withheld, conditioned
or delayed. Each insurer is hereby authorized and directed to make payment under
said policies, including return of unearned premiums, directly to Mortgagee
instead of to Mortgagor and Mortgagee jointly, and Mortgagor appoints Mortgagee
as Mortgagor’s attorney-in-fact to endorse any draft therefor. All Material
Insurance Claims proceeds may, at Mortgagee’s sole option, be applied to all or
any part of the Obligations and in any order (notwithstanding that such
Obligations may not then otherwise be due and payable) or to the repair and
restoration of any of the Property under such terms and conditions as Mortgagee
may reasonably impose; provided, however, that so long as no Event of Default
has occurred and is continuing, such proceeds shall be applied to the repair and
restoration of the Property. All other insurance claim proceeds must be applied
to the repair and restoration of the Property under terms and conditions
satisfactory to Mortgagee. For purposes of this paragraph 6, the term “Material
Insurance Claim” means any insurance claim in excess of $500,000.
     7. Installments for Insurance, Taxes and Other Charges. Upon Mortgagee’s
request at any time following the occurrence and during the continuance of an
Event of Default, Mortgagor shall pay to Mortgagee monthly, an amount equal to
one-twelfth (1/12) of the annual premiums for the insurance policies referred to
hereinabove and the annual Impositions and any other item which at any time may
be or become a lien upon the Property (the “Escrow Charges”). The amounts so
paid shall be used in payment of the Escrow Charges so long as no Event of
Default shall have occurred and is continuing. No amount so paid to Mortgagee
shall be deemed to be trust funds, nor shall any sums paid bear interest.
Mortgagee shall have no obligation to pay any insurance premium or Imposition if
at any time the funds being held by Mortgagee for such premium or Imposition are
insufficient to make such payments. If, at any time, the funds being held by
Mortgagee for any insurance premium or Imposition are exhausted, or if Mortgagee
determines, in its reasonable discretion, that such funds will be insufficient
to pay in full any insurance premium or Imposition when due, Mortgagor shall
promptly pay to Mortgagee, upon demand, an amount which Mortgagee shall estimate
as sufficient to make up the deficiency. Upon the occurrence and during the
continuance of an Event of Default, Mortgagee shall have the right, at its
election, to apply any amount so held against the Obligations due and payable in
such order as Mortgagee may deem fit, and Mortgagor hereby grants to Mortgagee a
lien upon and security interest in such amounts for such purpose.
     8. Condemnation. Mortgagor, immediately upon obtaining knowledge of the
institution of any proceedings for the condemnation or taking by eminent domain
of any of the Property, shall notify Mortgagee of the pendency of such
proceedings. Mortgagee may

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participate in any such proceedings and Mortgagor shall deliver to Mortgagee all
instruments requested by it to permit such participation. Any award or
compensation for property taken or for damage to property not taken in excess of
$500,000, whether as a result of such proceedings or in lieu thereof, is hereby
assigned to and shall be received and collected directly by Mortgagee, and any
award or compensation shall be applied, at Mortgagee’s option, to any part of
the Obligations and in any order (notwithstanding that any of such Obligations
may not then be due and payable) or to the repair and restoration of any of the
Property under such terms and conditions as Mortgagee may reasonably impose
provided, however, that so long as no Event of Default has occurred and is
continuing, such proceeds shall be applied to the repair and restoration of the
Property.
     9. Environmental Matters. (a) For purposes of this Section 9, the term
“Environmental Laws” shall mean all federal, state and local laws, regulations
and orders, whether now or in the future enacted or issued, pertaining to the
protection of land, water, air, health, safety or the environment. The term
“Regulated Substances” shall mean all substances regulated by Environmental
Laws, or which are known or considered to be harmful to the health or safety of
persons, or the presence of which may require investigation, notification or
remediation under the Environmental Laws. The term “Contamination” shall mean
the discharge, release, emission, disposal or escape of any Regulated Substances
into the environment other than as permitted under applicable Environmental
Laws.
          (b) Mortgagor represents and warrants except as provided in the Loan
Documents or otherwise disclosed to Lender in writing (i) that no Contamination
is present at, on or under the Property and that no Contamination is being or,
to the best of Mortgagor’s knowledge, has been emitted onto any surrounding
property other than as permitted under applicable Environmental Laws; (ii) all
operations and activities on the Property have been and are being conducted in
accordance with all Environmental Laws, and Mortgagor has all permits and
licenses required under the Environmental Laws; (iii) no underground or
aboveground storage tanks are or have been located on or under the Property; and
(iv) no legal or administrative proceeding is pending or, to the best of
Mortgagor’s knowledge, threatened relating to any environmental condition,
operation or activity on the Property regulated under any applicable
Environmental Laws, or any violation or alleged violation of Environmental Laws.
These representations and warranties shall be true as of the date hereof, and
shall be deemed to be continuing representations and warranties which must
remain true, correct and accurate during the entire duration of the term of this
Mortgage.
          (c) Mortgagor shall ensure, at its sole cost and expense, that the
Property and the conduct of all operations and activities thereon comply and
continue to comply with all Environmental Laws. Mortgagor shall notify Mortgagee
promptly and in reasonable detail in the event that Mortgagor becomes aware of
any violation of any Environmental Laws, the presence or release of any
Contamination with respect to the Property, or any governmental or third party
claims under applicable Environmental Laws relating to the environmental
condition of the Property or the conduct of operations or activities thereon.
Mortgagor also agrees not to permit or allow the presence of Regulated
Substances on any part of the Property, except (i) to the extent such Regulated
Substances are used without violating any Environmental Laws; and (ii) those
Regulated Substances which are naturally occurring on the Property. Mortgagor
agrees not to cause, allow or permit the presence of any Contamination on the
Property except

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to the extent such Contamination is in compliance with all applicable
Environmental Laws.
          (d) Mortgagee shall not be liable for, and Mortgagor shall indemnify,
defend and hold Mortgagee and all of its officers, directors, employees and
agents, and all of their respective successors and assigns harmless from and
against all losses, costs, liabilities, damages, fines, claims, penalties and
expenses (including reasonable attorneys’, consultants’ and contractors’ fees,
costs incurred in the investigation, defense and settlement of claims, as well
as costs incurred in connection with the investigation, remediation or
monitoring of any Regulated Substances or Contamination) that Mortgagee may
suffer or incur (including as holder of the Mortgage, as mortgagee in possession
or as successor in interest to Mortgagor as owner of the Property by virtue of a
foreclosure or acceptance of a deed in lieu of foreclosure) as a result of or in
connection with (i) any Environmental Laws (including the assertion that any
lien existing or arising pursuant to any Environmental Laws takes priority over
the lien of the Mortgage); (ii) the breach in any material respect of any
representation, warranty, covenant or undertaking by Mortgagor in this
Section 9; (iii) the presence on or the migration of any Contamination or
Regulated Substances on, under or through the Property; or (iv) any litigation
or claim by the government or by any third party in connection with the
environmental condition of the Property or the presence or migration of any
Regulated Substances or Contamination on, under, to or from the Property;
provided, however, that Mortgagor shall not be liable under this Section (d) for
any damages caused by Mortgagee’s gross negligence or willful misconduct.
          (e) Upon Mortgagee’s request, Mortgagor shall execute and deliver an
Environmental Indemnity Agreement satisfactory in form and substance to
Mortgagee, to more fully reflect Mortgagor’s representations, warranties,
covenants and indemnities with respect to the Environmental Laws.
     10. Inspection of Property. Mortgagee shall have the right to enter the
Property upon reasonable prior notice at any reasonable hour for the purpose of
inspecting the order, condition and repair of the buildings and improvements
erected thereon, as well as the conduct of operations and activities on the
Property. Mortgagee may enter the Property (and cause Mortgagee’s employees,
agents and consultants to enter the Property), upon reasonable prior written
notice to Mortgagor, to conduct any and all environmental testing deemed
appropriate by Mortgagee in his reasonable discretion. The environmental testing
shall be accomplished by whatever means Mortgagee may deem appropriate,
including the taking of soil samples and the installation of ground water
monitoring wells or other intrusive environmental tests. Mortgagor shall provide
Mortgagee (and Mortgagee’s employees, agents and consultants) reasonable rights
of access to the Property as well as such information about the Property and the
past or present conduct of operations and activities thereon as Mortgagee shall
reasonably request.
     11. Events of Default. The occurrence of any one or more of the following
events shall constitute an “Event of Default” hereunder: (a) any Event of
Default (as defined in the Credit Facility Agreement); (b) the failure by
Mortgagor to perform any of its other obligations under this Mortgage or under
any Environmental Indemnity Agreement executed and delivered pursuant to Section
9(e) for a period of fifteen (15) days or more after written notice thereof is
delivered to Mortgagor; (c) falsity, inaccuracy or material breach by Mortgagor
of any written warranty, representation or statement made herein by Mortgagor;
(d) any lien against or the

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making of any levy, seizure or attachment of or on the Property not dismissed or
adequately bonded within ninety (90) days; (e) the failure of Mortgagee to have
a mortgage lien on the Property; (f) foreclosure proceedings are instituted
against the Property upon any other lien or claim, whether alleged to be
superior or junior to the lien of this Mortgage which is not dismissed within
ninety (90) days; (g) the failure by Mortgagor to pay any Impositions as
required under Section 2(c), or to maintain in full force and effect any
insurance required under Section 5; or (h) Mortgagor or any other obligor or
guarantor of any of the Obligations, shall at any time deliver or cause to be
delivered to Mortgagee a notice pursuant to 42 Pa. C.S.A. §8143 electing to
limit the indebtedness secured by this Mortgage.
     12. Rights and Remedies of Mortgagee. If an Event of Default occurs,
Mortgagee may, at its option and without demand, notice or delay, do one or more
of the following:
          (a) Mortgagee may declare the entire unpaid principal balance of the
Obligations, together with all interest thereon, to be due and payable
immediately.
          (b) Mortgagee may (i) institute and maintain an action of mortgage
foreclosure against the Property and the interests of Mortgagor therein,
(ii) institute and maintain an action on any instruments evidencing the
Obligations or any portion thereof, and (iii) take such other action at law or
in equity for the enforcement of any of the Loan Documents as the law may allow,
and in each such action Mortgagee shall be entitled to all costs of suit and
attorneys fees.
          (c) Mortgagee may, in his sole and absolute discretion: (i) collect
any or all of the Rents, including any Rents past due and unpaid, (ii) perform
any obligation or exercise any right or remedy of Mortgagor under any Lease, or
(iii) enforce any obligation of any tenant of any of the Property. Mortgagee may
exercise any right under this subsection (c), whether or not Mortgagee shall
have entered into possession of any of the Property, and nothing herein
contained shall be construed as constituting Mortgagee a “mortgagee in
possession”, unless Mortgagee shall have entered into and shall continue to be
in actual possession of the Property. Mortgagor hereby authorizes and directs
each and every present and future tenant of any of the Property to pay all Rents
directly to Mortgagee and to perform all other obligations of that tenant for
the direct benefit of Mortgagee, as if Mortgagee were the landlord under the
Lease with that tenant, immediately upon receipt of a demand by Mortgagee to
make such payment or perform such obligations. Mortgagor hereby waives any
right, claim or demand it may now or hereafter have against any such tenant by
reason of such payment of Rents or performance of obligations to Mortgagee, and
any such payment or performance to Mortgagee shall discharge the obligations of
the tenant to make such payment or performance to Mortgagor.
          (d) Mortgagee shall have the right, in connection with the exercise of
its remedies hereunder, to the appointment of a receiver to take possession and
control of the Property or to collect the Rents, without notice and without
regard to the adequacy of the Property to secure the Obligations. A receiver
while in possession of the Property shall have the right to make repairs and to
make improvements necessary or advisable in its or his opinion to preserve the
Property, or to make and keep it rentable to the best advantage, and Mortgagee
may advance moneys to a receiver for such purposes. Any moneys so expended or
advanced by Mortgagee or by a receiver shall be added to and become a part of
the Obligations secured by

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this Mortgage.
     13. Application of Proceeds. Mortgagee shall apply the proceeds of any
foreclosure sale of, or other disposition or realization upon, or Rents or
profits from, the Property to satisfy the Obligations in such order of
application as Mortgagee shall determine in its exclusive discretion.
     14. Confession of Judgment in Ejectment. At any time after the occurrence
and during the continuance of an Event of Default, without further notice,
regardless of whether Mortgagee has asserted any other right or exercised any
other remedy under this Mortgage or any of the other Loan Documents, he shall be
lawful for any attorney of any court of record as attorney for Mortgagor to
confess judgment in ejectment against Mortgagor and all persons claiming under
Mortgagor for the recovery by Mortgagee of possession of all or any part of the
Property, for which this Mortgage shall be sufficient warrant. If for any reason
after such action shall have commenced the same shall be discontinued and the
possession of the Property shall remain in or be restored to Mortgagor,
Mortgagee shall have the right upon any subsequent default or defaults to bring
one or more amicable action or actions as hereinbefore set forth to recover
possession of all or any part of the Property.
     15. Mortgagee’s Right to Protect Security. Mortgagee is hereby authorized
to do any one or more of the following, irrespective of whether an Event of
Default has occurred: (a) appear in and defend any action or proceeding
purporting to affect the security hereof or Mortgagee’s rights or powers
hereunder if Mortgagor fails to so defend such action or proceeding to the
satisfaction of Mortgagee; (b) purchase such insurance policies covering the
Property as he may elect if Mortgagor fails to maintain the insurance coverage
required hereunder; and (c) take such action as Mortgagee may determine to pay,
perform or comply with any Impositions or Legal Requirements, to cure any Events
of Default and to protect its security in the Property.
     16. Appointment of Mortgagee as Attorney-in-Fact. Mortgagee, or any of his
officers, is hereby irrevocably appointed attorney-in-fact for Mortgagor
(without requiring any of them to act as such), such appointment being coupled
with an interest, to do any or all of the following: (a) collect the Rents after
the occurrence and during the continuance of an Event of Default; (b) settle
for, collect and receive any awards payable under Section 8 from the authorities
making the same; and (c) execute, deliver and file such financing statements and
other instruments as Mortgagee may require in order to perfect and maintain his
security interest under the Uniform Commercial Code on any portion of the
Property.
     17. Certain Waivers. Mortgagor hereby waives and releases all benefit that
might accrue to Mortgagor by virtue of any present or future law exempting the
Property, or any part of the proceeds arising from any sale thereof, from
attachment, levy or sale on execution, or providing for any stay of execution,
exemption from civil process or extension of time for payment or any rights of
marshalling in the event of any sale hereunder of the Property, and, unless
specifically required herein, all notices of Mortgagor’s default or of
Mortgagee’s election to exercise, or Mortgagee’s actual exercise of any option
under this Mortgage or any other Loan Document.

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     18. Notices. All notices, demands, requests, consents, approvals and other
communications required or permitted hereunder must be in writing and will be
effective upon receipt by Mortgagor or Mortgagee. Such notices and other
communications may be hand-delivered, sent by facsimile transmission with
confirmation of delivery and a copy sent by first-class mail, or sent by
nationally recognized overnight courier service, to a party’s address set forth
above or to such other address as Mortgagor or Mortgagee may give to the other
in writing for such purpose.
     19. Further Acts. Mortgagor will, at the cost of Mortgagor, and without
expense to Mortgagee, do, execute, acknowledge and deliver all further acts,
deeds, conveyances, mortgages, assignments, notices of assignment, transfers and
assurances as Mortgagee shall, from time to time, reasonably require for the
better assuring, conveying, assigning, transferring or confirming unto Mortgagee
the property and rights hereby mortgaged, or which Mortgagor may be or may
hereafter become bound to convey or assign to Mortgagee, or for carrying out the
intent of or facilitating the performance of the terms of this Mortgage or for
filing, registering or recording this Mortgage. Mortgagor grants to Mortgagee an
irrevocable power of attorney coupled with an interest for the purpose of
exercising and perfecting any and all rights and remedies available to Mortgagee
under the Note, this Mortgage, the other Loan Documents, at law or in equity,
including, without limitation, the rights and remedies described in this
paragraph.
     20. Changes in the Laws Regarding Taxation. If any law is enacted or
adopted or amended after the date of this Mortgage which deducts the Obligations
from the value of the Property for the purpose of taxation or which imposes a
tax, either directly or indirectly, on Mortgagor or Mortgagee’s interest in the
Property, Mortgagor will pay such tax, with interest and penalties thereon, if
any. If Mortgagee determines that the payment of such tax or interest and
penalties by Mortgagor would be unlawful or taxable to Mortgagee or
unenforceable or provide the basis for a defense of usury, then Mortgagee shall
have the option, by written notice of not less than one hundred twenty
(120) days, to declare the entire Obligations immediately due and payable.
     21. Documentary Stamps. If at any time the United States of America, any
State thereof or any subdivision of any such State shall require revenue or
other stamps to be affixed to the Note or this Mortgage, or impose any other tax
or charge on the same, Mortgagor will pay for the same, with interest and
penalties thereon, if any.
     22. Preservation of Rights. No delay or omission on Mortgagee’s part to
exercise any right or power arising hereunder will impair any such right or
power or be considered a waiver of any such right or power, nor will Mortgagee’s
action or inaction impair any such right or power. Mortgagee’s rights and
remedies hereunder are cumulative and not exclusive of any other rights or
remedies which Mortgagee may have under other agreements, at law or in equity.
Mortgagee may exercise any one or more of its rights and remedies without regard
to the adequacy of its security.
     23. Illegality. In case any one or more of the provisions contained in this
Mortgage should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability

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of the remaining provisions contained herein shall not in any way be affected or
impaired thereby.
     24. Changes in Writing. No modification, amendment or waiver of any
provision of this Mortgage nor consent to any departure by Mortgagor therefrom
will be effective unless made in a writing signed by Mortgagee, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on Mortgagor in any case will
entitle Mortgagor to any other or further notice or demand in the same, similar
or other circumstance.
     25. Entire Agreement. This Mortgage (including the documents and
instruments referred to herein) constitutes the entire agreement and supersedes
all other prior agreements and understandings, both written and oral, between
Mortgagor and Mortgagee with respect to the subject matter hereof.
     26. Survival; Successors and Assigns. This Mortgage will be binding upon
and inure to the benefit of Mortgagor and Mortgagee and their respective heirs,
executors, administrators, successors and assigns; provided, however, that
Mortgagor may not assign this Mortgage in whole or in part without Mortgagee’s
prior written consent and Mortgagee at any time may assign this Mortgage in
whole or in part; and provided, further, that the rights and benefits under the
Paragraphs entitled “Environmental Matters”, “Inspection of Property” and
“Indemnity” shall also inure to the benefit of any persons or entities who
acquire title or ownership of the Property from or through Mortgagee or through
action of Mortgagee (including a foreclosure, sheriff’s or judicial sale). The
provisions of Paragraphs entitled “Environmental Matters”, “Inspection of
Property” and “Indemnity” shall survive the termination, satisfaction or release
of this Mortgage, the foreclosure of this Mortgage or the delivery of a deed in
lieu of foreclosure.
     27. Interpretation. In this Mortgage, the singular includes the plural and
the plural the singular; references to statutes are to be construed as including
all statutory provisions consolidating, amending or replacing the statute
referred to; the word “or” shall be deemed to include “and/or”, the words
“including”, “includes” and “include” shall be deemed to be followed by the
words “without limitation” and references to sections or exhibits are to those
of this Mortgage unless otherwise indicated. Section headings in this Mortgage
are included for convenience of reference only and shall not constitute a part
of this Mortgage for any other purpose. If this Mortgage is executed by more
than one party as Mortgagor, the obligations of such persons or entities will be
joint and several.
     28. Indemnity. Mortgagor agrees to indemnify each of Mortgagee, his
affiliated companies, directors, officers and employees and Mortgagee’s holding
company, if any (the “Indemnified Parties”), and to hold each Indemnified Party
harmless from and against any and all claims, damages, losses, liabilities and
expenses (including all reasonable fees and charges of internal or external
counsel with whom any Indemnified Party may consult and all reasonable expenses
of litigation or preparation therefor) which any Indemnified Party may incur or
which may be asserted against any Indemnified Party in connection with or
arising out of the matters referred to in this Mortgage or in the other Loan
Documents by any person, entity or governmental authority (including any person
or entity claiming derivatively on behalf of

12

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Mortgagor), whether (a) arising from or incurred in connection with any breach
of a representation, warranty or covenant by Mortgagor, or (b) arising out of or
resulting from any suit, action, claim, proceeding or governmental
investigation, pending or threatened, whether based on statute, regulation or
order, or tort, or contract or otherwise, before any court or governmental
authority, which arises out of or relates to this Mortgage, any other Loan
Document, or the use of the proceeds of the Loan; provided, however, that the
foregoing indemnity agreement shall not apply to claims, damages, losses,
liabilities and expenses attributable to an Indemnified Party’s gross negligence
or willful misconduct. The indemnity agreement contained in this Section shall
survive the termination of this Mortgage, payment of any Loan and assignment of
any rights hereunder. Mortgagor may participate at its expense in the defense of
any such action or claim.
     29. Governing Law and Jurisdiction. This Mortgage has been delivered to and
accepted by Mortgagee and will be deemed to be made in the State where
Mortgagee’s office indicated above is located. This Mortgage will be interpreted
and the rights and liabilities of Mortgagor and Mortgagee determined in
accordance with the laws of the State where Mortgagee’s office indicated above
is located, except that the laws of the State where the Property is located (if
different from the State where such office of Mortgagee is located) shall govern
the creation, perfection and foreclosure of the liens created hereunder on the
Property or any interest therein. Mortgagor hereby irrevocably consents to the
exclusive jurisdiction of any state or federal court in the county or judicial
district where Mortgagee’s office indicated above is located; provided that
nothing contained in this Mortgage will prevent Mortgagee from bringing any
action, enforcing any award or judgment or exercising any rights against
Mortgagor individually, against any security or against any property of
Mortgagor within any other county, state or other foreign or domestic
jurisdiction. Mortgagor acknowledges and agrees that the venue provided above is
the most convenient forum for both Mortgagee and Mortgagor. Mortgagor waives any
objection to venue and any objection based on a more convenient forum in any
action instituted under this Mortgage.
     30. WAIVER OF JURY TRIAL. MORTGAGOR IRREVOCABLY WAIVES ANY AND ALL RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE
RELATING TO THIS MORTGAGE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
MORTGAGE OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. MORTGAGOR
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
[Signature Page Follows]

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Mortgagor acknowledges that it has read and understood all the provisions of
this Mortgage, including the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
WITNESS the due execution hereof as a document under seal, as of the date first
written above, with the intent to be legally bound hereby.

                                  ENVIRONMENTAL TECTONICS
CORPORATION
 
                   
ATTEST:
          By:        
 
              (SEAL)    
 
                   
 
  Print Name:
 
          Print Name:
 
   
 
  Title:
 
          Title:
 
   

The principal place of business
and complete post office address
of Mortgagee is:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
The address of Mortgagee for
the purposes of 42 Pa.C.S.
§8143(d) is:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428

14

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COMMONWEALTH OF PENNSYLVANIA
    )      
 
    )      ss:    
COUNTY OF BUCKS
    )      

     On this, the _________ day of _______________, 2009, before me, a Notary
Public, the undersigned officer, personally appeared
___________________________, who acknowledged himself/herself to be the
______________________________ of Environmental Tectonics Corporation, a
Pennsylvania corporation, and that he/she, in such capacity, being authorized to
do so, executed the foregoing instrument for the purposes therein contained by
signing on behalf of said corporation.
     IN WITNESS WHEREOF, I hereunto set my hand and official seal.

           
 
Notary Public
   

My commission expires:

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EXHIBITS

A.   Legal Description   B.   Permitted Encumbrances

16

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OPEN-END MORTGAGE AND SECURITY AGREEMENT
(THIS MORTGAGE SECURED FUTURE ADVANCES)
 
ENVIRONMENTAL TECTONICS CORPORATION
Mortgagor
AND
H.F. LENFEST,
Mortgagee
 
Return to:
Royer & Associates, LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406

 

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Exhibit B
PERMITTED ENCUMBRANCES
     All exceptions set forth on that certain Information Search conducted by
Abstract Services and Products (No. 138788-SFA “C”), with respect to the
Property.

 

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EXHBIT I
FORM OF SHAREHOLDERS VOTING AGREEMENT
SHAREHOLDERS VOTING AGREEMENT
     THIS SHAREHOLDERS VOTING AGREEMENT (this “Agreement”) is entered into as of
April 24, 2009, by and among William F. Mitchell (“Mitchell”) and any other
shareholders of Environmental Tectonics Corporation, a Pennsylvania corporation
(the “Corporation”), who have executed signature pages to this Agreement (such
persons together with Mitchell, collectively, the “Shareholders”), and H.F.
Lenfest (“Lenfest”) relating to the shares of Common Stock of the Corporation,
held by the Shareholders.
BACKGROUND:
     A. The Corporation is in need of additional funds in order to meet its
working capital requirements.
     B. The Corporation has requested that Lenfest make available to the
Corporation a secured line of credit facility in the principal amount of up to
$7,500,000, of which $3,000,000 has been made available as at the date hereof,
and the collateralized guaranty of an additional $5,000,000 of debt that the
Corporation will obtain from PNC Bank, National Association (“PNC”), with the
proceeds of each to be used for working capital and general corporate purposes
directly related to the growth of the business of the Corporation and the
performance of one or more significant contracts of the Corporation
(collectively, the “Credit Facility”).
     C. Lenfest has agreed to make funds and/or guaranties available to the
Corporation on the terms and conditions set forth in that certain Secured Credit
Facility and Warrant Purchase Agreement dated the date hereof between the
Corporation and Lenfest (the “Purchase Agreement”).
     D. The Purchase Agreement provides for the issuance by the Corporation of
secured subordinated promissory notes in the aggregate principal amount of up to
$7,500,000 (the “Notes”) and additional guaranties of PNC indebtedness in the
principal amount of up to $5,000,000 (the “Guaranties”).
     E. In connection with the Credit Facility, the Corporation is issuing to
Lenfest (i) shares of the Corporation’s Series D Convertible Preferred Stock,
par value $0.05 per share (the “Series D Preferred Stock”), which shares are
convertible into the Common Stock of the Corporation, par value $0.05 per share
(the “Common Stock”), as payment of origination fees on the Credit Facility and,
if Lenfest so elects in lieu of cash, interest on the Notes; (ii) warrants to
purchase shares of the Common Stock (the “Warrants”); and (iii) upon the
occurrence of certain triggering events as provided in the Purchase Agreement,
including the Corporation obtaining the Shareholder Approval Events (as
hereinafter defined), shares of the Corporation’s Series E Convertible Preferred
Stock, par value $0.05 per share (the “Series E Preferred Stock”), in

 

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conversion of and exchange for the Corporation’s existing subordinated
convertible promissory notes (the “Subordinated Convertible Notes”), the
Corporation’s Series B Convertible Preferred Stock, par value $0.05 per share
(the “Series B Preferred Stock”), and the Corporation’s Series C Convertible
Preferred Stock, par value $0.05 per share (the “Series C Preferred Stock” and
together with the Series B Preferred Stock, the Series D Preferred Stock and the
Series E Preferred Stock, the “Preferred Stock”), previously issued to Lenfest.
The entering into of the Credit Facility, including the issuance of the Notes,
the Guaranties, the Warrants and the Series D Preferred Stock and the Series E
Preferred Stock shall be referred to hereinafter as the “Transactions”).
     F. The Purchase Agreement provides that in order for Lenfest to make any
funds or guaranties available to the Corporation under the Credit Facility,
other than an initial loan of $1,000,000 to be extended to the Corporation on
the date hereof and the 2009 Bridge Note (as defined in the Purchase Agreement)
in the principal amount of $2,000,000 issued to the Corporation on February 20,
2009, among other things, the Corporation must obtain the affirmative vote of
the shareholders of the Corporation (i) to restore in full Lenfest’s voting
rights on his Common Stock and Preferred Stock in the Corporation, including any
securities convertible into or exercisable for Common Stock and any securities
to be issued as a result of the Transactions, (ii) to approve all other
necessary actions relating to the Transactions, and (iii) to elect a slate of
directors approved by Lenfest (such events collectively referred to herein as
the “Shareholder Approval Events”).
     G. As of the date hereof, each of the Shareholders is the record holder and
beneficial owner (as defined in Rule 13d-3 under the Securities Act of 1934, as
amended) and/or has voting power with respect to such number of shares of Common
Stock opposite his or its name on Exhibit A attached hereto (the “Shares”).
     H. It is a condition to the Closing (as defined in the Purchase Agreement)
of the Purchase Agreement that the Shareholders shall have executed and
delivered this Agreement and agree to vote their Shares in favor of the
Transactions and the Shareholder Approval Events.
     I. The Shareholders have agreed to vote their Shares in favor of the
consummation of the Transactions and the Shareholder Approval Events.
     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties, intending to be legally bound, hereby agree as follows:
     1. AGREEMENT TO VOTE SHARES. From and after the date of this Agreement and
ending on the Expiration Date (as defined in Section 5(c) below), each
Shareholder agrees that, at any meeting of the shareholders of the Corporation,
however called (the “Meeting”), he or it shall vote all of his or its respective
Shares (a) in favor of the Transactions, (b) in favor of the Shareholder
Approval Events and (c) against any action or agreement that would result in a
breach of any covenant, representation or warranty or any other obligation or
agreement of the Corporation made in connection with the Transactions.
     2. GRANT OF IRREVOCABLE PROXY. In order to ensure the voting of the
Shareholders in accordance with Section 1 of this Agreement, upon execution of
this Agreement

2

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by all parties, each Shareholder shall execute and deliver to Mitchell an
irrevocable proxy, in the form of Exhibit B hereto, granting to Mitchell the
right to vote in respect of all Shares now owned or hereafter registered in the
name of such Shareholder. It is understood and agreed that such irrevocable
proxy shall be in force and effect for and relate solely to voting in favor of
the Transactions and the Shareholder Approval Events or against any action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Corporation made in
connection with the Transactions and shall not constitute the grant of any
rights to said proxy to vote contrary to the foregoing express authority or as
to any other matters.
     3. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each Shareholder hereby
represents, warrants and covenants to Lenfest that he or it: (a) has full power
to enter into this Agreement, (b) has not, prior to the date of this Agreement,
granted and is not a party to, any proxy, voting trust or other agreement which
is inconsistent with or conflicts with the provisions of this Agreement, and
such party shall not grant any proxy or become party to any voting trust or
other agreement which is inconsistent with or conflicts with the provisions of
this Agreement, (c) upon completion of the Transactions will own, directly or
beneficially, at least the number of Shares set forth opposite such party’s name
on Exhibit A hereto, and (d) will not take any action inconsistent with the
intent and provisions of this Agreement, including, without limitation, the
transfer, sale or other disposition of any Shares prior to the Expiration Date,
in each case, unless the proposed transferee agrees to execute a copy of this
Agreement and become bound by the terms hereof, and any attempted transfer, sale
or disposition without executing a copy of this Agreement shall be null and
void.
     4. ENFORCEABILITY. Each Shareholder expressly agrees that this Agreement
shall be specifically enforceable against him or it in any court of competent
jurisdiction in accordance with its terms.
     5. GENERAL PROVISIONS.
          (a) All of the covenants and agreements contained in this Agreement
shall be binding upon, and enure to the benefit solely of, the parties and their
respective successors, assigns, heirs, executors, administrators and other legal
representatives, as the case may be, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person or entity any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
          (b) This Agreement may be executed by facsimile transmission and in
one or more counterparts, each of which will be deemed an original but all of
which together shall constitute one and the same instrument.
          (c) The terms of Sections 1 and 3, and the proxies delivered pursuant
to Section 2 of this Agreement shall remain in effect until the earlier of (i)
[June 30], 2009; and (ii) the day immediately following the date of the Meeting
or the date the Transactions and the Shareholder Approval Events are otherwise
approved by a majority of the shareholders of the Corporation (the “Expiration
Date”).

3

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          (d) If any provision of this Agreement shall be declared void or
unenforceable by any court or administrative board of competent jurisdiction,
such provision shall be deemed to have been severed from the remainder of the
Agreement and this Agreement shall continue in all respects to be valid and
enforceable.
          (e) No waivers of any breach of this Agreement extended by any party
hereto to any other party shall be construed as a waiver of any rights or
remedies of any other party hereto or with respect to any subsequent breach.
          (f) Whenever the context of this Agreement shall so require, the use
of the singular number shall include the plural and the use of any gender shall
include all genders.
          (g) This Agreement may not be modified, amended, altered or
supplemented without the written agreement of each of the parties hereto.
          (h) From time to time, at the request of either Lenfest or the
Corporation and without further consideration, the Shareholders shall execute
and deliver such additional documents and take all such further action as may be
reasonably necessary to consummate and make effective the transaction
contemplated by this Agreement.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Shareholder named below has caused this Agreement
to be duly executed as of the date first above written.

            SHAREHOLDER:
            Name:              

[Shareholder Signature Page to Shareholders Voting Agreement]

 

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     IN WITNESS WHEREOF, Lenfest has caused this Agreement to be duly executed
as of the date first above written.

                        H.F. Lenfest           

[Lenfest Signature Page to Shareholders Voting Agreement]

 

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EXHIBIT A

          Shareholder   Shares   % of Voting Power
 
       
William F. Mitchell
  1,081,324   8.77%

 

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EXHIBIT B
IRREVOCABLE PROXY
     The undersigned agrees to, and hereby grants William F. Mitchell
(“Mitchell”) an irrevocable proxy pursuant to the provisions of the Pennsylvania
Business Corporation Law to vote, or to execute and deliver written consents or
otherwise act with respect to, all shares of capital stock of Environmental
Tectonics Corporation, a Pennsylvania corporation (the “Corporation”), now owned
or hereafter acquired by the undersigned (collectively, the “Shares”) as fully,
to the same extent and with the same effect as the undersigned might or could do
under any applicable laws or regulations governing the rights and powers of
shareholders of a Pennsylvania corporation, as provided in Section 1 of that
certain Shareholders Voting Agreement, dated as of April 24, 2009 (the
“Shareholders Voting Agreement”), among Mitchell, H.F. Lenfest and other
signatories thereto. The undersigned hereby affirms that this irrevocable proxy
is given as a condition of the Shareholders Voting Agreement and, as such, is
coupled with an interest and is irrevocable. It is further understood by the
undersigned that this irrevocable proxy may be exercised by Mitchell for the
period beginning the date hereof and ending on the earlier of (i) August 20,
2009; and (ii) the day immediately following the date of (A) any meeting of the
shareholders of the Corporation at which the shareholders of the Corporation
vote to approve the Transactions and the Shareholder Approval Events (each as
defined in the Shareholders Voting Agreement) or (B) the date on which the
Transactions and the Shareholder Approval Events are otherwise approved by a
majority of the shareholders of the Corporation.
     THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST
ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE SHARES.

                Dated as of                     , 2009        Shareholder       
   

 

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EXHIBIT L
FORM OF CLOSING CERTIFICATE
OF
ENVIRONMENTAL TECTONICS CORPORATION
     The undersigned hereby certifies pursuant to Section 4.1(g)(viii) of that
certain Secured Credit Facility and Warrant Purchase Agreement dated as of
April 24, 2009 (the “Purchase Agreement”) by and between Environmental Tectonics
Corporation, a Pennsylvania corporation (the “Borrower”), and H. F. Lenfest (the
“Lender”), an individual residing in the Commonwealth of Pennsylvania, that no
Event of Default exists and that the conditions specified in Section 4.1 of the
Purchase Agreement, other than the conditions specified in Section 4.1(f) of the
Purchase Agreement for purposes of the Initial Closing, have been fully
satisfied by the Borrower or waived by the Lender as of the Closing. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed to them in the Purchase Agreement.
     IN WITNESS WHEREOF, the undersigned has executed this Closing Certificate
as of this       day of                     , 2009.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:           Name:           Title:      

 

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Exhibit M
SECURED PROMISSORY NOTE

      $2,000,000    February 20, 2009

     FOR VALUE RECEIVED, ENVIRONMENTAL TECTONICS CORPORATION, a Pennsylvania
corporation (“Maker”), does hereby promise to pay to the order of H.F. LENFEST,
an individual residing in the Commonwealth of Pennsylvania (“Payee”), at Payee’s
offices located at 300 Barr Harbor Drive, Suite 450, Conshohocken, Pennsylvania
19428, or at such other place as the holder hereof may from time to time direct
Maker in writing, the aggregate principal sum of TWO MILLION DOLLARS
($2,000,000) in lawful money of the United States of America, together with
interest accruing on the unpaid outstanding principal balance under this Secured
Promissory Note (this “Note”) as provided below. This Note is being issued to
Payee in connection with Payee’s providing working capital funding to support
Maker’s bid on a contract (the “Government Contract”) with the United States
government or a division thereof (the “Government”) by providing evidence of
Maker’s financial abilities to perform the Government Contract.
Interest Rate. Interest shall accrue on the outstanding principal amount hereof
at a rate of fifteen percent (15%) per annum, compounded annually (the “Interest
Rate”), until paid in full; provided, however, that the Interest Rate shall be
reduced automatically to ten percent (10%) per annum, compounded annually,
retroactively from the date hereof in the event the Company receives the
Shareholder Approval (as hereinafter defined). Interest may be payable, in the
sole discretion of Payee, (a) in cash, (b) in shares of a new series of
preferred stock that will be created in the event the Shareholder Approval is
obtained or (c) in shares of Common Stock (as hereinafter defined), which number
of shares of Common Stock to be determined by dividing the amount of interest
due on an interest payment date by the Market Price (as hereinafter defined) of
the Common Stock on such date. For purposes of this Note, the “Market Price” of
a share of Common Stock shall mean, as of any date, (i) the closing sale price
for the shares of Common Stock as reported on NYSE Alternext US LLC, the
successor to the American Stock Exchange (“AMEX”) by Bloomberg Financial Markets
(“Bloomberg”) for the trading day immediately preceding such date, or (ii) if
AMEX is not the principal trading market for the shares of Common Stock, the
average of the reported closing sale prices reported by Bloomberg on the
principal trading market for the Common Stock during the one hundred twenty
(120) day period immediately preceding such date, or (iii) if market value
cannot be calculated as of such date on any of the foregoing bases, the Market
Price shall be determined in good faith by the Board of Directors of the
Company. Interest shall be payable, at the option of Payee, on each anniversary
date of this Note, with any accrued and unpaid interest payable on the Maturity
Date. Payee shall deliver Maker at least five (5) days prior written notice if
it wishes to elect to be paid interest on an anniversary date.
Origination Fee. The Company shall pay to Payee an origination fee payable in
shares of common stock, par value $0.05 per share, of Maker (the “Common
Stock”), equal to 20,000 shares (the “Origination Fee Shares”). As soon as
practicable following the date hereof, the Company shall issue the Origination
Fee Shares and deliver to Payee a certificate evidencing such shares. In
addition and in further consideration of this Note, Maker is also issuing to
Payee a Common Stock Purchase Warrant exercisable for 143,885 shares of Common
Stock in

 

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accordance with the terms set forth therein (the “Warrant”). By acceptance of
this Note, the Origination Fee Shares and the Warrant, Payee hereby waives any
anti-dilution rights under (i) that certain Senior Subordinated Convertible
Note, dated as of February 20, 2003, (ii) the Series B convertible preferred
stock of Maker held by Payee, and (iii) the Series C convertible preferred stock
of Maker held by Payee, in connection with Maker’s issuance of the Origination
Fee Shares, the Warrant and the shares of Common Stock issuable upon exercise of
the Warrant.
Maturity; Use of Proceeds.
This Note shall mature and all unpaid principal and interest hereunder, if not
sooner paid in accordance with the provisions hereof, shall be due and payable
in full on the earlier of (i) three (3) days following the date Maker is
informed by the Government or otherwise learns that it has been denied or will
not be awarded the Government Contract; (ii) six (6) months following the date
hereof if Maker has not obtained the affirmative vote of the shareholders of
Maker for a new financing transaction with Payee and the restoration in full of
Payee’s voting rights on his preferred stock and common stock in Maker on or
before the Shareholder Approval Date (as defined in the Warrant) (the
“Shareholder Approval”); or (iii) three (3) years following the date hereof (the
earlier of (i), (ii) or (iii), the “Maturity Date”).
The proceeds of this Note shall be deposited into a newly created restricted
account and shall be used solely for working capital necessary for the
performance of the Government Contract. None of such proceeds shall be used for
any other purpose.
Prepayment. The principal amount of this Note may be prepaid, either in whole or
in part, at any time following the date hereof without premium or penalty. Any
such prepayment shall be accompanied by all accrued and unpaid interest on the
principal amount being prepaid.
Security. Maker has delivered as security for the performance of its obligations
under this instrument (i) a Security Agreement of even date herewith (the
“Security Agreement”) covering all of Maker’s property as described in the
Security Agreement; and (ii) a UCC-1 Financing Statement granting Payee a first
lien position on such property which shall be filed with the Department of State
of the Commonwealth of Pennsylvania. By acceptance of this Note, Payee covenants
and agrees that it will work in good faith with Maker and PNC Bank, NA to obtain
a waiver from PNC Bank, NA to allow the security interest granted pursuant to
the Security Agreement.
Default Interest. The entire outstanding principal balance hereunder,
irrespective of any declaration of maturity, as well as any other amounts owing
pursuant to this Note, shall bear interest at a default rate equal to the
Interest Rate plus six percent (6%) per annum (the “Default Rate”) until such
sum is paid in full from and after:
the Maturity Date;
earlier maturity of this Note either according to its terms or as the result of
a declaration of maturity made by the Payee, whether by acceleration or
otherwise; or
from and after an Event of Default (as defined below).

 

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Events of Default. Each of the following shall constitute an event of default
hereunder (an “Event of Default”):
the failure of Maker to make any payment to Payee within five (5) days of the
date when due hereunder;
the default by Maker in punctual performance of any of the non-monetary
obligations, covenants, terms or provisions contained or referred to in this
Note or the Security Agreement, each as amended, replaced or modified, if such
default shall continue unremedied for a period of ten (10) days following
written notice of default by Payee to Maker;
any warranty, representation or statement contained in this Note or the Security
Agreement proves to have been false;
any use of the proceeds of this Note for any purpose other than working capital
necessary for the performance of the Government Contract as provided in
Section 3(b);
a default by Maker in the performance of any covenant, condition or provision of
any loan documents between Maker and Payee, or any document related thereto,
that are currently in effect or will be entered into, and such default shall not
be remedied for a period of thirty (30) days after the earlier of (i) written
notice from Payee of such default or (ii) actual knowledge by Maker of such
default;
a default by Maker under any agreement with PNC Bank or any successor commercial
lender;
the filing by or against Maker of any proceeding in bankruptcy, insolvency,
receivership, reorganization, liquidation, conservatorship or similar proceeding
and, if filed against Maker, such proceeding is not dismissed within sixty
(60) days following the commencement thereof; and
any assignment by Maker for the benefit of any of its creditors, or any levy,
garnishment, attachment or similar proceeding is instituted against any property
of Maker and such proceeding shall remain undismissed or unstayed for a period
of sixty (60) days.
Remedies; Acceleration. Upon the occurrence of an Event of Default and at any
time thereafter during the continuance of such Event of Default hereunder, Payee
shall have the following rights or remedies:
to declare the entire unpaid amount of this Note immediately due and payable in
full; and/or
to exercise from time to time any and all rights and remedies available to it
under any then applicable law.
Rights Cumulative. The rights and remedies of Payee as provided herein shall be
cumulative and concurrent, and the failure to exercise any such right or remedy
shall in no event be construed as a waiver or release of the same. Payee shall
not by any act or omission or commission be deemed to waive any of his rights or
remedies under this Note unless such waiver be in writing and signed by Payee,
and then only to the extent specifically set forth therein; and a

 

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waiver of one event shall not be construed as continuing or as a bar to or
waiver of such right or remedy on a subsequent event.
Payment of Costs. Maker shall pay to Payee upon demand all of his costs and
expenses in enforcing or collecting the amounts due under this Note, including
reasonable attorneys’ fees.
Representations and Warranties of Maker.
Maker is a corporation duly formed and validly subsisting under the laws of the
Commonwealth of Pennsylvania and has the requisite corporate power and authority
to conduct its business as it is now being conducted.
Maker has all requisite legal and corporate power and authority to execute and
deliver this Note and the Security Agreement, to issue this Note and to carry
out and perform its other obligations under the terms of this Note and the
Security Agreement. The execution, delivery and performance by Maker of this
Note and the Security Agreement and the issuance of this Note have been duly
authorized by all necessary corporate action on the part of Maker.
This Note constitutes a valid and legally binding obligation of Maker,
enforceable against Maker in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency, reorganization,
moratorium, and other such laws affecting enforcement of creditors’ rights and
the relief of debtors generally, and (ii) rules of law governing specific
performance, injunctive relief or other equitable remedies.
As soon as practicable following the date hereof, Maker shall issue the
Origination Fee Shares and deliver to Payee a certificate representing such
shares.
The Origination Fee Shares are duly authorized and, upon issuance in accordance
with the terms of this Note, will be validly issued, fully paid and
non-assessable.
Waivers.
Maker expressly waives presentment for payment, notice of dishonor, protest,
notice of protest, diligence of collection, and any other notice of any kind,
and hereby consents to any number of renewals or extensions of time for payment
hereof, which renewals and extensions shall not affect the liability of any
party to this Note; and further agrees that Payee may accept, by way of
compromise or settlement, from any party, a sum or sums less than the amount due
Payee under this Note, and may give releases to such parties without affecting
the liability of any other party for the unpaid balance. Any such renewals or
extensions may be made and any such partial payments accepted or releases given
without notice to any such party.
Maker hereby waives and releases all procedural errors, defects and
imperfections in any proceeding instituted by Payee under the terms of this Note
as well as all benefits that might accrue to Maker by virtue of any present or
future laws (i) exempting any property, real, personal or mixed, or any part of
the proceeds arising from any sale of such property, from attachment, levy or
sale under execution; or (ii) providing for any stay of execution, exemption
from civil process, or extension of time for payment. Maker agrees that any real
estate that may be levied upon pursuant to a judgment obtained by virtue hereof,
on any writ of execution issued thereon, may be sold upon any such writ in whole
or in part or in any other manner desired by Payee.

 

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Notices. All notices required to be given to any of the parties hereunder shall
be in writing and shall be deemed to have been sufficiently given for all
purposes when sent by hand delivery or by commercial overnight delivery service
that requires signatures upon receipt (such as Federal Express), or mailed by
certified or registered mail, return receipt requested, postage prepaid,
addressed to such party at its address as set forth below or such other address
that such party hereafter designates by written notice to the other parties
below:
If to Payee:
c/o The Lenfest Group
300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
Attn: H.F. Lenfest
Telecopier: (610) 940-0602
with a copy to:
Royer & Associates LLC
681 Moore Road, Suite 321
King of Prussia, PA 19406
Attn: John E. Royer, Jr., Esquire
Telecopier: (610) 354-8896
If to Maker:
Environmental Tectonics Corporation
County Line Industrial Park
125 James Way
Southampton, PA 18966-3877
Attn: Chief Financial Officer
Telecopier: (215) 357-4000
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attn: William W. Matthews, Esquire
Telecopier: (215) 568-6603
     All such notices shall be deemed to have been given (a) when delivered, if
hand delivered or sent by overnight delivery service; or (b) three (3) business
days after deposit in the United States mail, if sent by certified or registered
mail.
Construction of Terms. The word “Maker” as used throughout this Note is intended
to and shall be construed to mean, individually and collectively, each and every
entity and/or person that has executed this Note and its successors and assigns.
All covenants, promises, agreements, authorizations, waivers, releases, options,
undertakings, rights and benefits made or given herein

 

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by Maker shall bind and affect all persons who are hereinabove defined as
“Maker” with the same effect as though all such persons were specifically named
herein whenever the word “Maker” is used.
Modifications. This Note may not be changed orally, but only by an agreement in
writing signed by Maker and Payee.
Governing Law. The provisions hereof shall be governed by and construed
according to the laws of the Commonwealth of Pennsylvania.
Consent to Jurisdiction. This Note shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to the conflict of law provisions
thereof. Maker irrevocably and unconditionally agrees that any suit, action or
other legal proceeding arising out of this Note may be brought in the courts of
record in Montgomery County, Commonwealth of Pennsylvania, or the United States
District Court for the Eastern District of Pennsylvania; consents to personal
jurisdiction in each such court in any such suit, action or proceeding; and
waives any objection concerning venue with respect to any suit, action or
proceeding in any of such courts.
WAIVER OF JURY TRIAL. MAKER IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO
A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO
THIS NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS NOTE OR ANY
TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. MAKER ACKNOWLEDGES THAT THE
FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
CONFESSION OF JUDGMENT. MAKER HEREBY IRREVOCABLY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE
COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR MAKER AT ANY TIME OR
TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS NOTE, OR THE
SECURITY AGREEMENT, IN ANY SUCH COURT IN ANY ACTION BROUGHT AGAINST MAKER BY
PAYEE WITH RESPECT TO THE AGGREGATE AMOUNTS PAYABLE HEREUNDER, WITH OR WITHOUT
DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST MAKER FOR ALL SUMS PAYABLE BY MAKER TO PAYEE HEREUNDER, AS EVIDENCED BY
AN AFFIDAVIT SIGNED BY A DULY AUTHORIZED DESIGNEE OF PAYEE SETTING FORTH SUCH
AMOUNT THEN DUE FROM MAKER TO PAYEE, PLUS AN ATTORNEY’S COMMISSION EQUAL TO TEN
PERCENT (10%) OF THE SUMS THEN OUTSTANDING UNDER THIS NOTE, BUT IN NO EVENT LESS
THAN $10,000, WITH COSTS OF SUIT, RELEASE OF PROCEDURAL ERRORS, OTHER THAN
NOTICES THAT MAY BE REQUIRED HEREUNDER, AND WITHOUT RIGHT OF APPEAL. IF A COPY
OF THIS NOTE, VERIFIED BY AN AFFIDAVIT, SHALL HAVE BEEN FILED IN SUCH ACTION, IT
SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY. MAKER
WAIVES THE RIGHT TO ANY STAY OF EXECUTION, THE BENEFIT OF ALL EXEMPTION LAWS NOW
OR HEREAFTER IN EFFECT AND ANY AND ALL RIGHTS TO PRIOR NOTICE AND HEARING WITH
RESPECT TO THE GARNISHMENT OR ATTACHMENT OF ANY PROPERTY PURSUANT TO A JUDGMENT
ENTERED HEREUNDER. NO SINGLE EXERCISE OF THE FOREGOING WARRANT AND POWER

 

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TO BRING ANY ACTION OR CONFESS JUDGMENT THEREIN SHALL BE DEEMED TO EXHAUST THE
POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED AND MAY BE EXERCISED FROM TIME
TO TIME AS OFTEN AS PAYEE SHALL ELECT UNTIL ALL AMOUNTS PAYABLE TO PAYEE
HEREUNDER, SHALL HAVE BEEN PAID IN FULL. THE EXERCISE BY PAYEE OF HIS RIGHTS AND
REMEDIES AND THE ENTRY OF ANY JUDGMENT BY PAYEE UNDER THIS SECTION SHALL NOT
AFFECT IN ANY WAY THE INTEREST RATE PAYABLE HEREUNDER OR ANY OTHER AMOUNTS DUE
TO PAYEE, BUT INTEREST SHALL CONTINUE TO ACCRUE ON SUCH AMOUNTS AT THE DEFAULT
RATE.
Headings. The headings preceding the text of the Sections hereof are inserted
solely for convenience of reference and shall not constitute a part of this
Note, nor shall they affect its meaning, construction or effect.
Severability. If any provision of this Note or the application thereof is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions hereof shall not be affected thereby, and each provision of
this Note shall be valid and enforceable to the fullest extent permitted by law.
Assignment; Successors and Assigns. This Note may not be assigned at any time by
Maker without the prior written consent of Payee, which consent may be withheld
for any reason. All of the terms and conditions herein shall be binding upon any
successors and assigns of Maker and inure to the benefit of Payee, his
successors and assigns.
Application of Payments. Payments received hereunder by Payee shall be applied
first to those payments described in Section 10 of this Note; second, to any
accrued and unpaid interest due hereunder; and third, to principal.
[Signature Page Follows]

 

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     IN WITNESS WHEREOF, Maker has caused this Note to be executed effective as
of the day and year first above written.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:   /s/ Duane D. Deanes     Name:   Duane D. Deanes     Title:   CFO  

 

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ENVIRONMENTAL TECTONICS CORPORATION
SECURITY AGREEMENT
     This SECURITY AGREEMENT (this “Agreement”) is made and entered into as of
February 18, 2009, by ENVIRONMENTAL TECTONICS CORPORATION (“Debtor”), in favor
of H.F. LENFEST (“Secured Party”).
RECITALS
     WHEREAS, Debtor has executed a Secured Promissory Note, dated the date
hereof, pursuant to which Debtor has borrowed $2,000,000 from Secured Party (the
“Note”). The parties intend that Debtor’s obligation to repay the Note be
secured by all of the assets of Debtor. Any capitalized terms not otherwise
defined herein shall have the meanings set forth in the Note.
AGREEMENT
     In consideration of the purchase of the Note by Secured Party and for other
good and valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Debtor hereby agrees with Secured Party as follows:
     1. Grant of Security Interest. To secure Debtor’s full and timely
performance of all of Debtor’s obligations and liabilities to Secured Party
pursuant to the Note (including, without limitation, Debtor’s obligation to
timely pay the principal amount of, and accrued interest on, the Note), and any
amendments, modifications or reissuance of the Note and all other debt owed by
Debtor to Secured Party, and all other amounts payable hereunder, including all
costs and expenses incurred by Secured Party to enforce Secured Party’s rights
hereunder (the “Obligations”), Debtor hereby grants to Secured Party a
continuing security interest (the “Security Interest”) in and to all of the
property described on Exhibit A to this Agreement (the “Collateral”) and all
proceeds and products thereof. Debtor will not grant any other security
interests in the Collateral without the written consent of Secured Party.
     2. Events of Default. For purposes of this Agreement, “Event of Default”
means any of the following:
          (a) Debtor’s failure to pay or discharge the Obligations in full in
accordance with the terms of the Note;
          (b) default by Debtor in punctual performance of any of the
non-monetary obligations, covenants, terms or provisions contained or referred
to in this Agreement, or the Note secured hereby, each as amended, replaced or
modified, if such default shall continue unremedied for a period of ten
(10) days following written notice of default by Secured Party to Debtor;
          (c) any use of the proceeds of the Note for any purpose other than
working capital necessary for the performance of the Government Contract;

 

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          (d) any warranty, representation or statement contained in this
Agreement or the Note proves to have been false;
          (e) loss, theft, substantial damage, destruction, sale (except as
authorized in this Agreement) or encumbrance to or of any portion of the
Collateral (except such encumbrances and liens which arise in the ordinary
course of business and both (A) do not materially impair Debtor’s ownership or
use of the Collateral and (B) are junior to and do not adversely affect the
security interest granted hereunder to Secured Party), or the making of any
levy, seizure or attachment thereof or thereon;
          (f) a default by Debtor in the performance of any covenant, condition
or provision of any loan documents between Debtor and Secured Party, or any
document related thereto, that are currently in effect or will be entered into,
and such default shall not be remedied for a period of thirty (30) days after
the earlier of (i) written notice from Secured Party of such default or
(ii) actual knowledge by Debtor of such default;
          (g) a default by Debtor under any agreement with PNC Bank or any
successor commercial lender;
          (h) (i) Debtor’s dissolution or termination or (ii) the commencement
of any proceeding under any bankruptcy or insolvency laws by Debtor or (iii) the
commencement of any proceeding under any bankruptcy or insolvency laws against
Debtor or by or against any guarantor, surety or endorser for Debtor that
results in the entry of an order for relief or which remains undismissed,
undischarged or unbonded for a period of sixty (60) days or more or (iv) Debtor
shall make a general assignment for the benefit of its creditors; or (v) Debtor
shall fail generally to pay its debts as they become due, or shall take any
action in furtherance of any of the foregoing;
          (i) any statement of the financial condition of Debtor or of any
guarantor, surety or endorser of any liability of Debtor to Secured Party
submitted to Secured Party by Debtor or any such guarantor, surety or endorser
proves to be false in any material respect.
Debtor shall provide Secured Party with immediate written notice upon the
occurrence of any Event of Default and of the circumstances relating to such
Event of Default.
     3. Payment Obligations of Debtor.
          (a) Debtor shall pay to Secured Party any sum or sums due or which may
become due pursuant to the Note in accordance with the terms of the Note and the
terms of this Agreement and any and all renewals, rearrangements or extensions
of the Note.
          (b) Debtor shall account fully and faithfully to Secured Party for
proceeds from disposition of the Collateral in any manner and, following an
Event of Default, shall pay or turn over promptly in cash, negotiable
instruments, drafts, assigned accounts or chattel paper all the proceeds from
each sale to be applied to Debtor’s Obligations to Secured Party, subject, if
other than cash, to final payment or collection.

 

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          (c) Following an Event of Default hereunder or under the Note, Debtor
shall pay to Secured Party on demand all reasonable expenses and expenditures
(including, but not limited to, reasonable fees and expenses of legal counsel)
incurred or paid by Secured Party in exercising or protecting its interests,
rights and remedies under this Agreement, plus interest thereon at the Default
Rate.
          (d) Debtor shall pay immediately, in accordance with the terms of the
Note, the entire unpaid balance of the Obligations of Debtor to Secured Party
whether created or incurred pursuant to this Agreement or otherwise, upon an
Event of Default.
     4. Representations, Warranties and Covenants of Debtor.
          (a) Other Liens. Except for the Security Interest, Debtor is the owner
of the Collateral and its proceeds and will be the owner of the Collateral and
its proceeds hereafter acquired free from unpaid charges, including taxes and
free from any adverse lien, security interest or encumbrance (other than
purchase money security interests that will be discharged upon Debtor’s payment
of the purchase price for the applicable property), and Debtor will defend the
Collateral against the claims and demands of all persons at any time claiming
the same or any interest therein. No financing statements covering any
Collateral or any proceeds thereof are on file in any public office and no third
party is holding any Collateral to perfect its interest therein.
          (b) Further Documentation. At any time and from time to time, upon the
written request of Secured Party, and at the sole expense of Debtor, Debtor will
promptly and duly execute and deliver such further instruments and documents and
take such further action as Secured Party may reasonably request for the purpose
of obtaining or preserving the full benefits of this Agreement and of the
rights, remedies and powers herein granted, including, without limitation,
filing any financing or continuation statements under the Uniform Commercial
Code (the “UCC”) in effect in any jurisdiction with respect to the liens created
hereby or taking any other action necessary to perfect the Security Interest.
Debtor also hereby authorizes Secured Party to file any such financing or
continuation statement without the signature of Debtor to the extent permitted
by applicable law. A reproduction of this Agreement shall be sufficient as a
financing statement (or as an exhibit to a financing statement on form UCC-1)
for filing in any jurisdiction.
          (c) Indemnification. Debtor agrees to defend, indemnify and hold
harmless Secured Party against any and all liabilities, costs and expenses
(including, without limitation, legal fees and expenses): (i) with respect to,
or resulting from, any delay in paying, any and all excise, sales or other taxes
which may be payable or determined to be payable with respect to any of the
Collateral, (ii) with respect to, or resulting from, any delay in complying with
any law, rule, regulation or order of any governmental authority applicable to
any of the Collateral, or (iii) in connection with any of the transactions
contemplated by this Agreement.
          (d) Maintenance of Records. Debtor will keep and maintain at its own
cost and expense accurate and complete records of the Collateral and its
proceeds.

 

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          (e) Inspection Rights. Secured Party may enter Debtor’s premises at
any reasonable time without interruption of Debtor’s business and without any
breach of the peace to inspect the Collateral and all the books, correspondence
and other records of Debtor relating to the Collateral, and Secured Party or its
representatives may examine such records and make photocopies or otherwise take
extracts from such records. Debtor agrees to render to Secured Party, at
Debtor’s expense, such clerical and other assistance as may be reasonably
requested with regard to the exercise of its rights pursuant to this paragraph.
          (f) Compliance with Laws, etc. Debtor will comply in all material
respects with all laws, rules, regulations and orders of any governmental
authority applicable to any part of the Collateral or to the operation of
Debtor’s business; provided, however, that Debtor may in good faith contest any
non-compliance with such law, rule, regulation or order in any reasonable manner
which does not and could not be reasonably deemed to, adversely affect Secured
Party’s rights or the priority of its liens on the Collateral.
          (g) Payment of Obligations. Debtor will pay promptly when due all
taxes, assessments, charges, liens or levies imposed upon the Collateral or with
respect to any of its income or profits derived from the Collateral, as well as
all claims of any kind (including, without limitation, claims for labor,
materials and supplies) against or with respect to the Collateral, except that
no such charge need be paid if (i) the validity of such charge is being
contested in good faith by appropriate proceedings, (ii) such proceedings do not
involve any material danger of the sale, forfeiture or loss of any of the
Collateral or any interest in the Collateral and (iii) such charge is adequately
reserved against on Debtor’s books in accordance with generally accepted
accounting principles.
          (h) Limitation on Liens on Collateral. Debtor will not create, incur
or permit to exist, will defend the Collateral against, and will take such other
action as is necessary to remove, any lien or claim on or to the Collateral,
other than the Security Interest, and will defend the right, title and interest
of Secured Party in and to any of the Collateral against the claims and demands
of all other persons.
          (i) Limitations on Dispositions of Collateral. Debtor will not sell,
transfer, lend, license, lease or otherwise dispose of any of the Collateral or
any interest therein, or attempt, offer or contract to do so; provided, however,
that Debtor will be allowed to grant licenses to its products and related
documentation in the ordinary course of business and to establish or provide for
escrows of related intellectual property in connection therewith. The Collateral
shall remain in Debtor’s possession or control at all times at Debtor’s risk of
loss until (i) sold, licensed or otherwise disposed of in the ordinary course of
business, provided that Secured Party shall be granted a security interest in
the proceeds and other consideration received for such Collateral, or (ii) as
authorized in writing by Secured Party.
          (j) Further Identification of Collateral. Debtor will furnish to
Secured Party from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as Secured Party may reasonably request, all in reasonable detail.

 

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          (k) Chief Executive Office. The location where Debtor maintains its
chief executive office is County Line Industrial Park, 125 James Way,
Southampton, PA 18966-3877. Debtor will promptly notify Secured Party in writing
of any change in the location of its chief executive office. Substantially all
of the tangible assets of Debtor will be held at its chief executive office.
          (l) Insurance. Debtor will have and maintain adequate insurance at all
times with respect to all Collateral against risks of fire, theft and such other
risks as Secured Party may reasonably request. Within ten (10) days after the
date hereof, Debtor shall amend such insurance policies, if necessary, to
contain a standard mortgagee’s endorsement providing for payment of any loss to
Secured Party and to provide for ten (10) days’ written minimum cancellation
notice to Secured Party. Debtor shall furnish Secured Party evidence of
compliance with the foregoing insurance provisions before February 28, 2009.
          (m) Information. All information in any financial, credit or
accounting statement (and any statement by Debtor related thereto) provided to
Secured Party prior to, contemporaneously with or subsequent to the execution of
this Agreement is and shall be true, correct, complete, valid and genuine in all
material respects.
          (n) Accounts. As to that portion of the Collateral which is accounts,
Debtor represents, warrants and agrees with respect to each such account that:
               (i) The account arose from the performance of services (including
without limitation the granting of any licenses or sales of databases and/or
information derived therefrom) which have been fully and satisfactorily
performed or from the lease or the absolute sale of goods, if any, by Debtor in
which Debtor had the sole and complete ownership, and the goods have been
shipped or delivered to the account debtor.
               (ii) The account is not subject to any prior or subsequent
assignment, claim, lien or security interest other than that of Secured Party.
               (iii) The account is not subject to set-off, counterclaim,
defense, allowance or adjustment other than discounts for prompt payment shown
on the invoice, or to dispute, objection or complaint by the account debtor
concerning his liability on the account, and the goods, the sale or lease of
which gave rise to the account, have not been returned, rejected, lost or
damaged.
               (iv) The account arose in the ordinary course of Debtor’s
business, and no notice of bankruptcy, insolvency or financial embarrassment of
the account debtor has been received by Debtor.
     5. Secured Party’s Appointment as Attorney-in-Fact.
          (a) Powers. Debtor hereby appoints Secured Party, and any officer or
agent of Secured Party, with full power of substitution, as its attorney-in-fact
with full irrevocable power and authority in the place of Debtor and in the name
of Debtor or in its own name, from time to time in Secured Party’s discretion so
long as an Event of Default has occurred and is continuing, for the purpose of
carrying out the terms of this Agreement, to take any and all

 

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appropriate action and to execute any instrument which may be necessary or
desirable to accomplish the purposes of this Agreement. Without limiting the
foregoing, so long as an Event of Default has occurred and is continuing,
Secured Party shall have the right, without notice to, or the consent of,
Debtor, to do any of the following on Debtor’s behalf:
          (i) to pay or discharge any taxes, assessments, charges, liens or
levies levied or placed on or threatened against the Collateral;
          (ii) to direct any party liable for any payment under any of the
Collateral to make payment of any and all amounts due or to become due
thereunder directly to Secured Party or as Secured Party directs;
          (iii) to ask for or demand, collect, and receive payment of and
receipt for, any payments due or to become due at any time in respect of or
arising out of any Collateral;
          (iv) to commence and prosecute any suits, actions or proceedings at
law or in equity in any court of competent jurisdiction to enforce any right in
respect of any Collateral;
          (v) to defend any suit, action or proceeding brought against Debtor
with respect to any Collateral;
          (vi) to settle, compromise or adjust any suit, action or proceeding
described in subsection (v) above and, to give such discharges or releases in
connection therewith as Secured Party may deem appropriate;
          (vii) to assign any patent, trademark or copyright included in the
Collateral of Debtor (along with the goodwill of the business to which any such
patent, trademark or copyright pertains), throughout the world for such term or
terms, on such conditions, and in such manner, as Secured Party shall in his
sole discretion determine;
          (viii) generally, to sell, transfer, pledge and make any agreement
with respect to or otherwise deal with any of the Collateral, and to take, at
Secured Party’s option and Debtor’s expense, any actions which Secured Party
shall deem necessary to protect, preserve or realize upon the Collateral and
Secured Party’s lien on the Collateral and to carry out the intent of this
Agreement, in each case to the same extent as if Secured Party were the absolute
owner of the Collateral for all purposes; and
          (ix) to obtain, adjust, settle and cancel such insurance and endorsing
any drafts drawn by insurers of the Collateral. Secured Party may apply any
proceeds of such insurance which may be received by them in payment on account
of the obligations secured hereby, whether due or not.
Debtor hereby ratifies whatever actions Secured Party shall lawfully do or cause
to be done in accordance with this Section 5. This power of attorney shall be a
power coupled with an interest and shall be irrevocable.
     (b) No Duty on Secured Party’s Part. The powers conferred on Secured Party
by this Section 5 are solely to protect Secured Party’s interests in the
Collateral and shall

 

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not impose any duty upon it to exercise any such powers. Secured Party shall be
accountable only for amounts that he actually receives as a result of the
exercise of such powers, and neither Secured Party nor any of his employees or
agents shall, in the absence of willful misconduct or gross negligence, be
responsible to Debtor for any act or failure to act pursuant to this Section 5.
     6. Performance by Secured Party of Debtor’s Obligations. If Debtor fails to
perform or comply with any of its agreements or covenants contained in this
Agreement and Secured Party performs or complies, or otherwise causes
performance or compliance, with such agreement or covenant in accordance with
the terms of this Agreement, then the reasonable expenses of Secured Party
incurred in connection with such performance or compliance shall be payable by
Debtor to Secured Party on demand with interest thereon at the rate specified in
Section 3(c) and shall constitute Obligations secured by this Agreement.
     7. Remedies. If an Event of Default has occurred and is continuing, Secured
Party may exercise, in addition to all other rights and remedies granted to him
in this Agreement and in any other instrument or agreement relating to the
Obligations, all rights and remedies of a secured party under the UCC in effect
in the local jurisdiction where the Collateral is located. Without limiting the
foregoing, Secured Party, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
which may not be waived by law) to or upon Debtor or any other person (all of
which demands, defenses, advertisements and notices are hereby waived), may in
such circumstances collect, receive, appropriate and realize upon any or all of
the Collateral, and/or may sell, lease, assign, give an option or options to
purchase, or otherwise dispose of and deliver any or all of the Collateral (or
contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, at any exchange, broker’s board or office of Secured
Party or elsewhere upon such terms and conditions as Secured Party may deem
advisable, for cash or on credit or for future delivery without assumption of
any credit risk. Secured Party shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase all or any part of the Collateral so sold, free of any right or
equity of redemption in Debtor, which right or equity is hereby waived or
released. Secured Party shall apply the net proceeds of any such collection,
recovery, receipt, appropriation, realization or sale, after deducting all
reasonable expenses incurred therein or in connection with the care or
safekeeping of any of the Collateral or in any way relating to the Collateral or
the rights of Secured Party under this Agreement (including, without limitation,
reasonable attorneys’ fees and expenses), to the payment in whole or in part of
the Obligations, in such order as Secured Party may elect, and only after such
application and after the payment by Secured Party of any other amount required
by any provision of law, if any surplus remains, to Debtor or whoever may be
lawfully entitled thereto. To the extent permitted by applicable law, Debtor
waives all claims, damages and demands it may acquire against Secured Party
arising out of the exercise by Secured Party of any of its rights hereunder. If
any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least five (5) days before such sale or other disposition, unless the Collateral
is perishable or threatens to decline quickly in value or is of a type
customarily sold on a recognized market, in which case notice need not be given.
Debtor shall remain liable for any deficiency if the proceeds of any sale or
other disposition of the Collateral are insufficient to pay the Obligations,
including without limitation the fees and disbursements of any attorneys
employed by Secured Party to collect such deficiency.

 

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     8. Limitation on Duties Regarding Preservation of Collateral. The sole duty
of Secured Party with respect to the custody, safekeeping and preservation of
the Collateral, under the Pennsylvania Uniform Commercial Code or otherwise,
shall be to deal with it in good faith. Neither Secured Party nor any of his
employees or agents shall be liable for failure to demand, collect or realize
upon all or any part of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of Debtor or otherwise.
     9. Powers Coupled with an Interest. All authorizations and agencies
contained in this Agreement with respect to the Collateral are irrevocable and
powers coupled with an interest.
     10. No Waiver; Cumulative Remedies. Secured Party shall not by any act
(except by a written instrument pursuant to Section 11(a) hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any default under the Note or in any breach
of any of the terms and conditions of this Agreement. No failure to exercise,
nor any delay in exercising, on the part of Secured Party, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by Secured Party of any right or remedy under this Agreement on any one
occasion shall not be construed as a bar to any right or remedy which Secured
Party would otherwise have on any subsequent occasion. The rights and remedies
provided in this Agreement are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
     11. Miscellaneous.
          (a) Amendments and Waivers. Any term of this Agreement may be amended
or waived only with the written consent of Debtor and Secured Party. Any
amendment or waiver effected in accordance with this Section 11(a) shall be
binding upon the parties hereto and their respective successors and assigns.
          (b) Transfer; Successors and Assigns. The rights and obligations of
Secured Party and Debtor hereunder may not be transferred or assigned by any
party without the prior written consent of the other parties hereto, except
Secured Party may transfer or assign his rights and obligations under this
Agreement to any corporation, partnership, limited liability company or limited
liability partnership owned or controlled by Secured Party, or any shareholders,
directors, executive officers, affiliates, partners or limited partners thereof
or of Secured Party or a registered investment company with a common advisor and
in such case the assignee shall be entitled to all of the rights, privileges and
remedies granted in this Agreement to Secured Party provided that the transfer
does not violate applicable securities laws; and is in connection with a
concurrent assignment or transfer of the Note held by Secured Party to such
assignee or transferee; and in such event Debtor will assert no claims or
defenses, other than a defense that it has performed its obligations under the
Note and this Agreement, it may have against Secured Party against the assignee,
except those granted in this Agreement. Any permitted assignee of Debtor or
Secured Party shall agree in writing prior to the effectiveness of such
assignment to be bound by the provisions hereof. All of the stipulations,
promises and

 

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agreements in this Agreement made by or on behalf of Debtor shall bind the
successors and permitted assigns of Debtor, whether so expressed or not, and
inure to the benefit of the successors and permitted assigns of Debtor and
Secured Party.
     (c) Governing Law; Consent to Jurisdiction. This Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania without regard to the
conflict of law provisions thereof. Debtor irrevocably and unconditionally
agrees that any suit, action or other legal proceeding arising out of this
Agreement may be brought in the courts of record in Montgomery County,
Commonwealth of Pennsylvania, or the United States District Court for the
Eastern District of Pennsylvania; consents to personal jurisdiction in each such
court in any such suit, action or proceeding; and waives any objection
concerning venue with respect to any suit, action or proceeding in any of such
courts.
     (d) WAIVER OF JURY TRIAL. DEBTOR IRREVOCABLY WAIVES ANY AND ALL RIGHT IT
MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE
RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. DEBTOR
ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
     (e) CONFESSION OF JUDGMENT. DEBTOR HEREBY IRREVOCABLY AUTHORIZES AND
EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY OR CLERK OF ANY COURT IN
THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, TO APPEAR FOR DEBTOR AT ANY TIME
OR TIMES, AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THIS AGREEMENT, OR
THE NOTE, IN ANY SUCH COURT IN ANY ACTION BROUGHT AGAINST DEBTOR BY SECURED
PARTY WITH RESPECT TO THE AGGREGATE AMOUNTS PAYABLE HEREUNDER, WITH OR WITHOUT
DECLARATION FILED, AS OF ANY TERM, AND THEREIN TO CONFESS OR ENTER JUDGMENT
AGAINST DEBTOR FOR ALL SUMS PAYABLE BY DEBTOR TO SECURED PARTY HEREUNDER, AS
EVIDENCED BY AN AFFIDAVIT SIGNED BY A DULY AUTHORIZED DESIGNEE OF SECURED PARTY
SETTING FORTH SUCH AMOUNT THEN DUE FROM DEBTOR TO SECURED PARTY, PLUS AN
ATTORNEY’S COMMISSION EQUAL TO TEN PERCENT (10%) OF THE SUMS THEN OUTSTANDING
UNDER THIS NOTE, BUT IN NO EVENT LESS THAN $10,000, WITH COSTS OF SUIT, RELEASE
OF PROCEDURAL ERRORS, OTHER THAN NOTICES THAT MAY BE REQUIRED HEREUNDER, AND
WITHOUT RIGHT OF APPEAL. IF A COPY OF THIS NOTE, VERIFIED BY AN AFFIDAVIT, SHALL
HAVE BEEN FILED IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL
AS A WARRANT OF ATTORNEY. DEBTOR WAIVES THE RIGHT TO ANY STAY OF EXECUTION, THE
BENEFIT OF ALL EXEMPTION LAWS NOW OR HEREAFTER IN EFFECT AND ANY AND ALL RIGHTS
TO PRIOR NOTICE AND HEARING WITH RESPECT TO THE GARNISHMENT OR ATTACHMENT OF ANY
PROPERTY PURSUANT TO A JUDGMENT ENTERED HEREUNDER. NO SINGLE EXERCISE OF THE
FOREGOING WARRANT AND POWER TO BRING ANY ACTION OR CONFESS JUDGMENT THEREIN
SHALL BE DEEMED TO EXHAUST THE POWER, BUT THE POWER SHALL CONTINUE UNDIMINISHED
AND

 

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EXHIBIT N
FORM OF COMPLIANCE CERTIFICATE

     
TO:
  H.F. LENFEST
 
   
FROM:
  ENVIRONMENTAL TECTONICS CORPORATION

The undersigned executive officer of Environmental Tectonics Corporation (the
“Borrower”) hereby certifies that in accordance with the terms and conditions of
that certain Secured Credit Facility and Warrant Purchase Agreement between the
Borrower and H.F. Lenfest dated as of April 24, 2009 (the “Purchase Agreement”),
(i) except as noted below, for the period ending                     , the
Borrower is in material compliance with all required covenants other than the
covenant set forth in Section 7.3 with which the Borrower is in complete
compliance; (ii) all representations and warranties of the Borrower stated in
the Purchase Agreement are true and correct in all material respects as of the
date hereof; and (iii) no Event of Default exists. Attached herewith are the
required documents supporting the above certification. The undersigned further
certifies that the attached financial statements were prepared in accordance
with GAAP consistently applied from one period to the next except as explained
in an accompanying letter or footnotes. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the
Purchase Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.

              Reporting Covenant   Required   Complies
 
           
Quarterly financial statements
  Within 45 days following the end of each fiscal quarter   Yes   No
 
           
Annual (CPA Audited)
  Within 90 days following the end of each fiscal year   Yes   No

                  Actual Consolidated         Financial Covenant   Tangible Net
Worth   Complies
 
           
The Borrower must maintain Consolidated Tangible Net Worth of at least
$3,500,000 as of the end of each fiscal quarter
      Yes   No

[Signature Page Follows]

 

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          Comments Regarding Exceptions: See Attached.   LENDER USE ONLY

       
 
  Received by:    
 
       
Sincerely,
      AUTHORIZED SIGNER
 
       
 
  Date:    
 
       
 
       
 
SIGNATURE
  Verified:    
 
       
 
      AUTHORIZED SIGNER
 
       
 
PRINT NAME
  Date:    
 
       
 
            Compliance Status                                           
Yes          No
TITLE 
       

 

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MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS SECURED PARTY SHALL ELECT UNTIL
ALL AMOUNTS PAYABLE TO SECURED PARTY HEREUNDER, SHALL HAVE BEEN PAID IN FULL.
THE EXERCISE BY SECURED PARTY OF HIS RIGHTS AND REMEDIES AND THE ENTRY OF ANY
JUDGMENT BY SECURED PARTY UNDER THIS SECTION SHALL NOT AFFECT IN ANY WAY THE
INTEREST RATE PAYABLE HEREUNDER OR ANY OTHER AMOUNTS DUE TO SECURED PARTY, BUT
INTEREST SHALL CONTINUE TO ACCRUE ON SUCH AMOUNTS AT THE DEFAULT RATE.
     (f) Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
     (g) Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
     (h) Notices. Any notice required or permitted by this Agreement shall be in
writing and shall be deemed sufficient upon receipt if received on a business
day before 4:00 p.m. local time of recipient (if not, then on the next business
day), when delivered personally or by courier, overnight delivery service or
confirmed facsimile, or four (4) business days after being deposited in the U.S.
mail as certified or registered mail with postage prepaid, if such notice is
addressed to the party to be notified at such party’s address or facsimile
number as set forth on the signature page hereto, or as subsequently modified by
written notice.
     (i) Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties hereto agree to renegotiate
such provision in good faith in order to maintain the economic position enjoyed
by each party as close as possible to that under the provision rendered
unenforceable. In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.
     (j) Entire Agreement. This Agreement, and the documents referred to herein
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof, and any and all other written or oral agreements existing
between the parties hereto concerning such subject matter are expressly
canceled.
     (k) Construction. “Secured Party” and “Debtor,” as used in this instrument,
include the administrators, successors, representatives, receivers, trustees and
assigns of such party.
[Signature Page Follows]

 

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     Debtor and Secured Party have caused this Security Agreement to be duly
executed and delivered as of the date first above written.

            DEBTOR:

ENVIRONMENTAL TECTONICS CORPORATION
      By:         Name:         Title:        

Address:   County Line Industrial Park
125 James Way
Southampton, PA 18966-3877
Facsimile Number: (___) ____________
SECURED PARTY:
                                        
H.F. Lenfest
Address:    300 Barr Harbor Drive, Suite 460
West Conshohocken, PA 19428
Facsimile Number: (610) 940-0602

 

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EXHIBIT A
The Collateral shall consist of all assets of Debtor.

 

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THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
EXCEPT AS OTHERWISE SET FORTH HEREIN, NEITHER THIS WARRANT NOR ANY OF SUCH
SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR PURSUANT TO AN
EXEMPTION THEREFROM.

      April 23, 2009
(Original Warrant Date: February 20, 2009)   Warrant to Purchase
Shares of Common Stock

ENVIRONMENTAL TECTONICS CORPORATION
AMENDED AND RESTATED COMMON STOCK WARRANT
     THIS CERTIFIES THAT, for value received, H.F. Lenfest, or his registered
assigns (each, a “Holder”), is entitled to purchase from Environmental Tectonics
Corporation, a Pennsylvania corporation (the “Company”), at any time or from
time to time during the Exercise Period (as hereinafter defined), the number of
fully paid and nonassessable shares of the Company’s common stock, par value
$0.05 per share (the “Common Stock”), set forth in Section 1 hereof, at the
exercise price set forth in Section 2 hereof, subject to adjustment as provided
herein. This Amended and Restated Common Stock Warrant (this “Warrant”) amends
and restates in its entirety and replaces the Common Stock Warrant issued to the
Holder by the Company on February 20, 2009. This Warrant has been issued
pursuant to, and subject to the terms of, that certain Secured Promissory Note,
dated as of February 20, 2009, issued by the Company to the Holder (the “Note”).
The term “Warrant Shares”, as used herein, refers to the shares of Common Stock
purchasable hereunder. The term “Warrants” means this Warrant and any warrants
issued as a result of the transfer, exchange or replacement of such warrants.
Capitalized terms not otherwise defined herein shall have the meanings given to
such terms in the Note.
     This Warrant is subject to the following terms, provisions and conditions:
     1. Number of Shares. During the Exercise Period, the Holder shall be
entitled to purchase 143,885 shares of Common Stock under this Warrant;
provided, however, that if the Shareholder Approval (as hereinafter defined) is
not obtained by the Shareholder Approval Date (as hereinafter defined), the
Holder shall be entitled to purchase 719,424 shares of Common Stock under this
Warrant, unless the Company repays in full all principal, accrued interest and
all other amounts payable under the Note on or before the Shareholder Approval
Date.
     2. Exercise Price. The exercise price of this Warrant (the “Exercise
Price”) shall be a price per share equal to $1.39; provided, however, that if
the Shareholder Approval is not obtained by the Shareholder Approval Date, the
Exercise Price shall be $0.69 per share, unless the Company repays in full all
principal, accrued interest and all other amounts payable under the Note on or
before the Shareholder Approval Date.

 

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     3. Period of Exercise. This Warrant is exercisable at any time or from time
to time beginning on the date of issuance (the “Issue Date”) and ending at 5:00
p.m., Philadelphia, Pennsylvania time on the seventh (7th) anniversary of the
Issue Date (the “Exercise Period”).
     4. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the Holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the “Exercise
Agreement”), to the Company during normal business hours on any business day at
the Company’s principal executive offices (or such other office or agency of the
Company as it may designate by notice to the Holder hereof), and upon payment to
the Company in cash, by certified or official bank check or by wire transfer for
the account of the Company of the Exercise Price for the Warrant Shares
specified in the Exercise Agreement. The Warrant Shares so purchased shall be
deemed to be issued to the Holder hereof or such Holder’s designee, as the
record owner of such shares, as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement shall
have been delivered and payment shall have been made for such shares as set
forth above. Certificates for the Warrant Shares so purchased, representing the
aggregate number of shares specified in the Exercise Agreement, shall be
delivered to the Holder hereof within fifteen (15) business days after this
Warrant shall have been so exercised. The certificates so delivered shall be in
such denominations as may be requested by the Holder hereof and shall be
registered in the name of such Holder or such other name as shall be designated
by such Holder. If this Warrant shall have been exercised only in part, then,
unless this Warrant has expired, the Company shall, at its expense, as soon as
practicable after the date of exercise, deliver to the Holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised.
     5. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
          (a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in
accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof.
          (b) Reservation of Shares. During the Exercise Period, the Company
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant.
          (c) Listing. The Company shall use its reasonable best efforts to
secure the listing of the Warrant Shares upon each securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall use its reasonable best efforts to maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all Warrant Shares.
          (d) Certain Actions Prohibited. The Company will not, by amendment of
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
directly or indirectly, by operation of

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law or otherwise, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed by it hereunder, but will at all times in
good faith assist in the carrying out of all the provisions of this Warrant and
in the taking of all such action as may reasonably be requested by the Holder of
this Warrant in order to protect the exercise privilege of the Holder of this
Warrant against dilution or other impairment, consistent with the tenor and
purpose of this Warrant.
          (e) Successors and Assigns. This Warrant will be binding upon any
entity succeeding to the Company or its assets.
     6. Antidilution Provisions. During the Exercise Period, the Exercise Price
and the number of Warrant Shares shall be subject to adjustment from time to
time as provided in this Section 6. In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such Exercise
Price shall be rounded off to the nearest cent.
          (a) Sale of Securities Below Current Exercise Price. Except as
otherwise provided in Sections 6(b) and 6(d), if at any time the Company shall
issue or, pursuant to the provisions hereof, be deemed to have issued (other
than as set forth in Section 6(a)(vi) hereof) any shares of Common Stock,
Convertible Securities (as hereinafter defined), Rights (as hereinafter defined)
or Related Rights (as hereinafter defined) (collectively, “Securities”) without
consideration or for a consideration per share less than the Exercise Price in
effect immediately prior to the issuance of such Securities, then the Exercise
Price in effect immediately prior to each such issuance shall forthwith be
reduced to a price determined in accordance with the following formula:
EP2 = EP1 * (A + B) ÷ (A + C).
     For purposes of the foregoing formula, the following definitions shall
apply:
                    (a) “EP2” shall mean the Exercise Price for the Common Stock
in effect immediately after such issuance of Securities;
                    (b) “EP1” shall mean the Exercise Price of the Common Stock
in effect immediately prior to such issuance of Securities;
                    (c) “A” shall mean the number of shares of Common Stock
actually outstanding immediately prior to such issuance of Securities (excluding
shares of Common Stock issuable on conversion or exercise of preferred stock,
convertible promissory notes, options, warrants and other options to purchase or
rights to subscribe for such convertible or exchangeable securities);
                    (d) “B” shall mean the number of additional shares of Common
Stock that would have been issued if such Securities had been issued at a price
per share equal to EP1 (determined by dividing the aggregate consideration
received by the Company in respect of such issue by EP1); and
                    (e) “C” shall mean the number of such Securities issued in
such transaction.

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For the purpose of this Section 6(a), the following definitions, procedures and
exceptions shall be applicable:
          (i) Rights. In the case of the issuance of options, warrants or other
rights to purchase or otherwise acquire shares of Common Stock, whether or not
at the time exercisable (collectively, “Rights”), the total number of shares of
Common Stock issuable upon exercise of such Rights shall be deemed to have been
issued at the time such Rights are issued, for a consideration equal to the sum
of the consideration, if any, received by the Company upon the issuance of such
Rights and the minimum purchase or exercise price payable upon the exercise of
such Rights for the Common Stock to be issued upon the exercise thereof; and the
consideration per share shall be determined by dividing (i) the aggregate
consideration so received by and payable to the Company, by (ii) the number of
shares of Common Stock issuable upon exercise of such Rights.
          (ii) Convertible Securities and Related Rights. In the case of the
issuance of any class or series of stock or any bonds, debentures, notes or
other securities or obligations convertible into or exchangeable for Common
Stock, whether or not then convertible or exchangeable (collectively,
“Convertible Securities”), or options, warrants or other rights to purchase or
otherwise acquire Convertible Securities (collectively, “Related Rights”), the
total number of shares of Common Stock issuable upon the conversion or exchange
of such Convertible Securities or exercise of such Related Rights shall be
deemed to have been issued at the time such Convertible Securities or Related
Rights are issued, for a consideration equal to the sum of (A) the
consideration, if any, received by the Company upon issuance of such Convertible
Securities or Related Rights (excluding any cash received on account of accrued
interest or dividends) and (B)(1) in the case of Convertible Securities, the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of such Convertible Securities or (2) in the case of
Related Rights, the sum of (x) the minimum purchase or exercise price payable
upon the exercise of such Related Rights for Convertible Securities and (y) the
minimum additional consideration, if any, to be received by the Company upon the
conversion or exchange of the Convertible Securities issued upon the exercise of
such Related Rights; and the consideration per share shall be determined by
dividing (i) the aggregate consideration so received by and payable to the
Company, by (ii) the number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities or exercise of such Related Rights.
          (iii) Changes. On any change in the number of shares of Common Stock
issuable upon the exercise of Rights or Related Rights or upon the conversion or
exchange of Convertible Securities or on any change in the minimum purchase or
exercise price of Rights, Related Rights or Convertible Securities, including,
but not limited to, a change resulting from the anti-dilution provisions of such
Rights, Related Rights or Convertible Securities, the Exercise Price to the
extent in any way affected by such Rights, Related Rights or Convertible
Securities shall forthwith be readjusted to be thereafter the Exercise Price
that would have been obtained had the adjustment which was made upon the
issuance of such Rights, Related Rights or Convertible Securities been made
after giving effect to such change. No further adjustment shall be made in
respect of such change upon the actual issuance of Common Stock or any payment
of

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consideration upon the exercise of such Rights or Related Rights or the
conversion or exchange of such Convertible Securities.
          (iv) Expiration or Cancellation. On the expiration or cancellation of
any such Rights, Related Rights or Convertible Securities, if the Exercise Price
shall have been adjusted upon the issuance thereof, the Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been obtained had
the adjustment made upon the issuance of such Rights, Related Rights or
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of such
Rights or Related Rights or the conversion or exchange of such Convertible
Securities.
          (v) Cash. In the case of the issuance of such Securities for cash, the
amount of consideration received by the Company shall be deemed to be the amount
of cash paid therefor before deducting any reasonable discounts, commissions or
other expenses paid or incurred by the Company for any underwriting or otherwise
in connection with the issuance and sale thereof. In the case of the issuance of
such Securities for consideration other than cash, the amount of consideration
received by the Company shall be determined in good faith by the Company’s Board
of Directors.
          (vi) Exceptions to Adjustment of Exercise Price. No adjustment to the
Exercise Price will be made (i) upon the exercise of any warrants, options or
convertible securities issued and outstanding on the Issue Date in accordance
with the terms of such securities as of such date; (ii) upon exercise of any
stock or options which may hereafter be exercised under any employee benefit
plan of the Company now existing or to be implemented in the future, so long as
the issuance of such stock or options is approved by a majority of the
non-employee members of the Board of Directors of the Company or a majority of
the members of a committee of non-employee directors established for such
purpose; (iii) upon exercise of the Warrant; (iv) upon the issuance of
securities in connection with any strategic transaction that is approved by the
Board of Directors of the Company, including the Holder if then a director; or
(v) upon the issuance of securities in connection with any financing transaction
with the Holder or any of his affiliates.
          (b) Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization,
reorganization, reclassification or otherwise) the shares of Common Stock
acquirable hereunder into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company at any
time combines (by reverse stock split, recapitalization, reorganization,
reclassification or otherwise) the shares of Common Stock acquirable hereunder
into a smaller number of shares, then, after the date of record for effecting
such combination, the Exercise Price in effect immediately prior to such
combination will be proportionately increased.
          (c) Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to

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the Exercise Price in effect immediately prior to such adjustment by the number
of shares of Common Stock issuable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
          (d) Consolidation, Merger or Sale. In case of any consolidation of the
Company with, or merger of the Company into any other company, or in case of any
sale or conveyance of all or substantially all of the assets of the Company
other than in connection with a plan of complete liquidation of the Company,
then as a condition of such consolidation, merger or sale or conveyance,
adequate provision will be made whereby the Holder of this Warrant will have the
right to acquire and receive upon exercise of this Warrant in lieu of the shares
of Common Stock immediately theretofore acquirable upon the exercise of this
Warrant, such shares of stock, securities or assets as the Holder of the Warrant
would have received had the Warrant been exercised immediately prior to such
consolidation, merger or sale or conveyance. In any such case, the Company will
make appropriate provision to insure that the provisions of this Section 6
hereof will thereafter be applicable as nearly as may be in relation to any
shares of stock or securities thereafter deliverable upon the exercise of this
Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor or acquiring
entity (if other than the Company) and, if an entity different from the
successor or acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock of the Company are entitled to receive as a result
of such consolidation, merger or sale or conveyance assumes by written
instrument the obligations of the Company under this Warrant (including under
this Section 6) and the obligations to deliver to the Holder of this Warrant
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to acquire. This Section 6(d) shall apply
to any successive consolidations, mergers, sales or conveyances.
          (e) Distribution of Assets. In case the Company shall declare or make
any distribution of its assets (including cash) to holders of Common Stock as a
partial liquidating dividend, by way of return of capital or otherwise, then,
after the date of record for determining stockholders entitled to such
distribution, but prior to the date of distribution, the Holder of this Warrant
shall be entitled upon exercise of this Warrant for the purchase of any or all
of the shares of Common Stock subject hereto, to receive the amount of such
assets which would have been payable to the Holder had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of stockholders entitled to such distribution.
          (f) Notice of Adjustment. Upon the occurrence of any event which
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the Holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
          (g) Minimum Adjustment of Exercise Price. No adjustment of the
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which,

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together with any adjustments so carried forward, shall amount to not less than
1% of such Exercise Price.
          (h) No Fractional Shares. No fractional shares of Common Stock are to
be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
          (i) Other Notices. In case at any time:
          (i) the Company shall declare any dividend upon the Common Stock
payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings)
to the holders of the Common Stock;
          (ii) there shall be any capital reorganization of the Company, or
reclassification of the Common Stock, or consolidation or merger of the Company
with or into, or sale of all, substantially all or a material portion of its
assets to, another Company or entity; or
          (iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the Holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Common Stock entitled to receive
any such dividend or distribution or for determining the holders of Common Stock
entitled to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, notice of the date (or, if not
then known, a reasonable approximation thereof by the Company) when the same
shall take place. Such notice shall also specify the date on which the holders
of Common Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least ten (10) business days prior to
the record date or the date on which the Company’s books are closed in respect
thereto. Failure to give any such notice or any defect therein shall not affect
the validity of the proceedings referred to in clauses (i), (ii) and
(iii) above; provided that if notice is not given in accordance with this
Section 6(i), the Company will use its best efforts to insure that the Holder of
this Warrant shall nevertheless receive the same rights and benefits received by
other holders of securities of the Company from the proceedings referred to in
clauses (i), (ii) and (iii) above, unless the Holder of this Warrant chooses not
to receive such rights and benefits.
          (j) Certain Events. If any event occurs of the type contemplated by
the adjustment provisions of this Section 6 but not expressly provided for by
such provisions, the Company will give notice of such event as provided in
Section 6(i) hereof, and the Company’s Board of Directors will make an
appropriate adjustment in the Exercise Price and the number of

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shares of Common Stock acquirable upon exercise of this Warrant so that the
rights of the Holder shall be neither enhanced nor diminished by such event.
          (k) Certain Definitions.
          (i) “Shareholder Approval” means such time as the Company obtains the
affirmative vote of the shareholders of the Company for a new financing
transaction with the Holder and the restoration in full of the Holder’s voting
rights on his preferred stock and common stock in the Company.
          (ii) “Shareholder Approval Date” means July 2, 2009; provided,
however, that if the SEC provides any comments to the proxy statement that the
Company is filing in connection with the Shareholder Approval, the Shareholder
Approval Date shall mean forty-five (45) days after the SEC comments are
received but in no event shall such date be later than August 13, 2009.
     7. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the Holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof.
     8. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder hereof to any voting rights, rights to dividends, or other
rights as a shareholder of the Company. No provision of this Warrant, in the
absence of affirmative action by the Holder hereof to purchase Warrant Shares,
and no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for the Exercise Price or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
     9. Transfer, Exchange and Replacement of Warrant.
          (a) Restriction on Transfer. This Warrant and the rights granted to
the Holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 9(e)
below; provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 9(f). Notwithstanding the foregoing, this
Warrant, the shares of Common Stock issuable upon exercise hereof, and the
rights granted hereunder may not be transferred to a competitor of the Company
or any Subsidiary or affiliate of the Company.
          (b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the Holder hereof at the office or
agency of the Company referred to in Section 9(e) below, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by the Holder hereof at the time of such surrender.
          (c) Replacement of Warrant. Upon receipt of evidence of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of any such
loss, theft, or destruction,

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upon delivery of an indemnity agreement reasonably satisfactory in form and
amount to the Company, or, in the case of any such mutilation, upon surrender
and cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
     (d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
in connection with any transfer, exchange or replacement as provided in this
Section 9, this Warrant shall be promptly canceled by the Company. The Company
shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 9.
     (e) Register. The Company shall maintain, at its principal executive
offices (or such other office or agency of the Company as it may designate by
notice to the Holder hereof), a register for this Warrant, in which the Company
shall record the name and address of the person in whose name this Warrant has
been issued, as well as the name and address of each transferee and each prior
owner of this Warrant.
     (f) Exercise or Transfer Without Registration. If, at the time of the
surrender of this Warrant in connection with any exercise, transfer, or exchange
of this Warrant, this Warrant (or, in the case of any exercise, the Warrant
Shares issuable hereunder), shall not be registered under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as
a condition of allowing such exercise, transfer, or exchange, that the Holder or
transferee of this Warrant, as the case may be, furnish to the Company a written
opinion of counsel to the effect that such exercise, transfer, or exchange may
be made without registration under the Securities Act and under applicable state
securities or blue sky laws; provided however, that no legal opinion shall be
required in connection with a transfer pursuant to Rule 144 under the Securities
Act unless in the opinion of counsel to the Company, such transfer does not
comply with the provisions of Rule 144. Notwithstanding the foregoing, the
initial Holder of this Warrant, by taking and holding the same, represents to
the Company that such Holder is acquiring this Warrant for investment and not
with a present view to the distribution thereof.
     10. Notices. Any notice which is required or provided to be given under
this Warrant shall be deemed to have been sufficiently given and received for
all purposes when delivered by hand, telecopy (if a copy of such confirmed
telecopy transmission shall be contemporaneously sent by first class mail), or
nationally recognized overnight courier, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, to the following addresses:
     If to the Company:
Environmental Tectonics Corporation
125 James Way
Southampton, PA 18966
Attention: Chief Financial Officer
Facsimile: (215) 357-4000

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     With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
260 S. Broad Street
Philadelphia, PA 19102
Attention: William Matthews, Esquire
Facsimile: (215) 568-6603
     If to a Holder hereof, at the address shown for such Holder on the books of
the Company; or, with respect to any party hereto, at any other address
designated in writing by such party in accordance with the provisions of this
Section 10.
     11. Governing Law; Jurisdiction. This Warrant shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
applicable to agreements made and to be performed in the Commonwealth of
Pennsylvania (without regard to principles of conflict of laws). The Company and
the Holder hereof consent to the jurisdiction of the United States federal
courts and the state courts located in the Commonwealth of Pennsylvania with
respect to any suit or proceeding based on or arising under this Warrant or the
transactions contemplated hereby and agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and the Holder
hereof waive the defense of an inconvenient forum to the maintenance of such
suit or proceeding and agree that service of process upon a party mailed by
first class mail shall be deemed in every respect effective service of process
upon the party in any such suit or proceeding. Nothing herein shall affect
either party’s right to serve process in any other manner permitted by law.
     12. Miscellaneous.
          (a) Amendments. This Warrant and any provision hereof may only be
amended by an instrument in writing signed by the Company and the Holder.
          (b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
[SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.

            ENVIRONMENTAL TECTONICS CORPORATION
      By:   /s/ Duane D. Deanes       Name:   Duane D. Deanes       Title:   CFO
   

ACKNOWLEDGED:
 

/s/ H. F. Lenfest    
 
   
H. F. Lenfest
   

 

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FORM OF EXERCISE AGREEMENT
Dated: ___________ __, 20__

To:    [Company]
[Address]

     The undersigned, pursuant to the provisions set forth in the Warrant
attached hereto, hereby agrees to purchase ____________ shares of Common Stock
covered by such Warrant, and makes payment herewith in full therefor at the
price per share provided by such Warrant in cash, by wire transfer or by
certified or official bank check in the amount of $____________. Please issue a
certificate or certificates for such shares of Common Stock in the name of and
pay any cash for any fractional share to:

                  Name:             

            Signature:          Address:             

  Note:   The above signature should correspond exactly with the name on the
face of the within Warrant.

and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.

 

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FORM OF ASSIGNMENT
     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:

          Name of Assignee   Address   No. of Shares          

, and hereby irrevocably constitutes and appoints
_____________________________________________ as agent and attorney-in-fact to
transfer said Warrant on the books of the within-named Company, with full power
of substitution in the premises.
Dated: ________________ ___, 20 ___
In the presence of:
__________________

            Name:                  Signature:         
Title of Signing Officer or Agent (if any):

            Address:             

  Note:   The above signature should correspond exactly with the name on the
face of the within Warrant.