Document:

EXHIBIT 10.3

Exhibit 10.3

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. 

	 	 	 
	February 20, 2009

	 	Warrant to Purchase
	 

	 	Shares of Common Stock

ENVIRONMENTAL TECTONICS CORPORATION

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. 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 Promissory
Note, dated as of February 20, 2009, issued by the Company to the Holder (the “Note”). 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; provided, however, that if (i) all principal, accrued
interest and all other amounts payable under the Note are not repaid in full on or before June 24,
2009, or (ii) 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.

     2. Exercise Price. The exercise price (the “Exercise Price”) shall be a price per
share equal to $1.39; provided, however, that if (i) all principal, accrued interest and all other
amounts payable under the Note are not repaid in full on or before June 24, 2009, or (ii) the
Shareholder Approval is not obtained by the Shareholder Approval Date, the Exercise Price shall be
$0.69.

 

 

     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,

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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

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                                   (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:

               (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

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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.

               (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.

               (vii) Limitation on Additional Shares. Notwithstanding anything to the contrary
contained herein, so long as the Common Stock remains listed on AMEX, in no event will the
Company be obligated to issue a number of shares of Common Stock upon exercise of this
Warrant in excess of the maximum number of shares of Common Stock permissible under Section
713 of the Listing Standards, Policies and Requirements of the NYSE Alternext US Company
Guide in the event that the approval of the shareholders of the Company to the transaction
to which the issuance of this Warrant relates is then required under such Section 713 (or
any successor rule) unless such

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approval has been obtained; provided, however, that the
foregoing limitation shall not apply to any transaction referenced in Section 6(d)
hereof, and in the event of any such transaction the Company, its successor and any other
applicable party, as the case may be, shall be obligated to deliver, and the Holder shall be
entitled to receive, the appropriate consideration for this Warrant as described in
Section 6(d).

          (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 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.

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          (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, 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

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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 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 60 days following the date the Company and the
Holder enter into definitive agreements relating to a new financing transaction with the
Holder, which will include as a condition thereto, among other things, the restoration in
full of the Holder’s voting rights on his preferred stock and common stock in the Company;
provided, however, that such date shall be extended by 30 days if the SEC provides any
comments to the proxy statement that the Company is filing in connection with the
Shareholder Approval; provided, further, that in no event shall such date be later than June
24, 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

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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.

          (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,

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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

     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:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

Dated as of February 20, 2009

 

 

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.

 

 

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.exv4w1

Exhibit 4.1

WARRANT TO PURCHASE CLASS A COMMON STOCK

THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR
SUCH LAWS. THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER PROVISIONS
OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE ISSUER OF THESE SECURITIES AND THE INVESTOR REFERRED
TO THEREIN, A COPY OF WHICH IS ON FILE WITH THE ISSUER. THE SECURITIES REPRESENTED BY THIS
INSTRUMENT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT. ANY
SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL BE VOID.

WARRANT

to purchase

1,104,370

Shares of Class A Common Stock

of Royal Bancshares of Pennsylvania, Inc.

Issue Date: February 20, 2009

     1. Definitions. Unless the context otherwise requires, when used herein the
following terms shall have the meanings indicated.

     “Affiliate” has the meaning ascribed to it in the Purchase Agreement.

     “Appraisal Procedure” means a procedure whereby two independent appraisers, one chosen by the
Company and one by the Original Warrantholder, shall mutually agree upon the determinations then
the subject of appraisal. Each party shall deliver a notice to the other appointing its appraiser
within 15 days after the Appraisal Procedure is invoked. If within 30 days after appointment of
the two appraisers they are unable to agree upon the amount in question, a third independent
appraiser shall be chosen within 10 days thereafter by the mutual consent of such first two
appraisers. The decision of the third appraiser so appointed and chosen shall be given within 30
days after the selection of such third appraiser. If three appraisers shall be appointed and the
determination of one appraiser is disparate from the middle determination by more than twice the
amount by which the other determination is disparate from the middle determination, then the
determination of such appraiser shall be excluded, the remaining two determinations shall be
averaged and such average shall be binding and conclusive upon the Company and the Original
Warrantholder; otherwise, the average of all three determinations shall be binding upon the Company
and the Original Warrantholder. The costs of conducting any Appraisal Procedure shall be borne by
the Company.

 

 

     “Board of Directors” means the board of directors of the Company, including any duly
authorized committee thereof.

     “Business Combination” means a merger, consolidation, statutory share exchange or similar
transaction that requires the approval of the Company’s stockholders.

     “business day” means any day except Saturday, Sunday and any day on which banking institutions
in the State of New York generally are authorized or required by law or other governmental actions
to close.

     “Capital Stock” means (A) with respect to any Person that is a corporation or company, any and
all shares, interests, participations or other equivalents (however designated) of capital or
capital stock of such Person and (B) with respect to any Person that is not a corporation or
company, any and all partnership or other equity interests of such Person.

     “Charter” means, with respect to any Person, its certificate or articles of incorporation,
articles of association, or similar organizational document.

     “Common Stock” has the meaning ascribed to it in the Purchase Agreement.

     “Company” means the Person whose name, corporate or other organizational form and jurisdiction
of organization is set forth in Item 1 of Schedule A hereto.

     “conversion” has the meaning set forth in Section 13(B).

     “convertible securities” has the meaning set forth in Section 13(B).

     “CPP” has the meaning ascribed to it in the Purchase Agreement.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor
statute, and the rules and regulations promulgated thereunder.

     “Exercise Price” means the amount set forth in Item 2 of Schedule A hereto. “Expiration Time”
has the meaning set forth in Section 3.

     “Fair Market Value” means, with respect to any security or other property, the fair market
value of such security or other property as determined by the Board of Directors, acting in good
faith or, with respect to Section 14, as determined by the Original Warrantholder acting in good
faith. For so long as the Original Warrantholder holds this Warrant or any portion thereof, it may
object in writing to the Board of Director’s calculation of fair market value within 10 days of
receipt of written notice thereof. If the Original Warrantholder and the Company are unable to
agree on fair market value during the 10-day period following the delivery of the Original
Warrantholder’s objection, the Appraisal Procedure may be invoked by either party to determine Fair
Market Value by delivering written notification thereof not later than the 30th day after delivery
of the Original Warrantholder’s objection.

2

 

     “Governmental Entities” has the meaning ascribed to it in the Purchase Agreement. “Initial
Number” has the meaning set forth in Section 13(B).

     “Issue Date” means the date set forth in Item 3 of Schedule A hereto.

     “Market Price” means, with respect to a particular security, on any given day, the last
reported sale price regular way or, in case no such reported sale takes place on such day, the
average of the last closing bid and ask prices regular way, in either case on the principal
national securities exchange on which the applicable securities are listed or admitted to trading,
or if not listed or admitted to trading on any national securities exchange, the average of the
closing bid and ask prices as furnished by two members of the Financial Industry Regulatory
Authority, Inc. selected from time to time by the Company for that purpose. “Market Price” shall
be determined without reference to after hours or extended hours trading. If such security is not
listed and traded in a manner that the quotations referred to above are available for the period
required hereunder, the Market Price per share of Common Stock shall be deemed to be (i) in the
event that any portion of the Warrant is held by the Original Warrantholder, the fair market value
per share of such security as determined in good faith by the Original Warrantholder or (ii) in all
other circumstances, the fair market value per share of such security as determined in good faith
by the Board of Directors in reliance on an opinion of a nationally recognized independent
investment banking corporation retained by the Company for this purpose and certified in a
resolution to the Warrantholder. For the purposes of determining the Market Price of the Common
Stock on the “trading day” preceding, on or following the occurrence of an event, (i) that trading
day shall be deemed to commence immediately after the regular scheduled closing time of trading on
the New York Stock Exchange or, if trading is closed at an earlier time, such earlier time and
(ii) that trading day shall end at the next regular scheduled closing time, or if trading is closed
at an earlier time, such earlier time (for the avoidance of doubt, and as an example, if the Market
Price is to be determined as of the last trading day preceding a specified event and the closing
time of trading on a particular day is 4:00 p.m. and the specified event occurs at 5:00 p.m. on
that day, the Market Price would be determined by reference to such 4:00 p.m. closing price).

     “Ordinary Cash Dividends” means a regular quarterly cash dividend on shares of Common Stock
out of surplus or net profits legally available therefor (determined in accordance with generally
accepted accounting principles in effect from time to time), provided that Ordinary Cash Dividends
shall not include any cash dividends paid subsequent to the Issue Date to the extent the aggregate
per share dividends paid on the outstanding Common Stock in any quarter exceed the amount set forth
in Item 4 of Schedule A hereto, as adjusted for any stock split, stock dividend, reverse stock
split, reclassification or similar transaction.

     “Original Warrantholder” means the United States Department of the Treasury. Any actions
specified to be taken by the Original Warrantholder hereunder may only be taken by such Person and
not by any other Warrantholder.

     “Permitted Transactions” has the meaning set forth in Section 13(B).

3

 

     “Person” has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act.

     “Per Share Fair Market Value” has the meaning set forth in Section 13(C).

     “Preferred Shares” means the perpetual preferred stock issued to the Original Warrantholder on
the Issue Date pursuant to the Purchase Agreement.

     “Pro Rata Repurchases” means any purchase of shares of Common Stock by the Company or any
Affiliate thereof pursuant to (A) any tender offer or exchange offer subject to Section 13(e) or
14(e) of the Exchange Act or Regulation 14E promulgated thereunder or (B) any other offer available
to substantially all holders of Common Stock, in the case of both (A) or (B), whether for cash,
shares of Capital Stock of the Company, other securities of the Company, evidences of indebtedness
of the Company or any other Person or any other property (including, without limitation, shares of
Capital Stock, other securities or evidences of indebtedness of a subsidiary), or any combination
thereof, effected while this Warrant is outstanding. The “Effective Date” of a Pro Rata Repurchase
shall mean the date of acceptance of shares for purchase or exchange by the Company under any
tender or exchange offer which is a Pro Rata Repurchase or the date of purchase with respect to any
Pro Rata Repurchase that is not a tender or exchange offer.

     “Purchase Agreement” means the Securities Purchase Agreement – Standard Terms incorporated
into the Letter Agreement, dated as of the date set forth in Item 5 of Schedule A hereto, as
amended from time to time, between the Company and the United States Department of the Treasury
(the “Letter Agreement”), including all annexes and schedules thereto.

     “Qualified Equity Offering” has the meaning ascribed to it in the Purchase Agreement.

     “Regulatory Approvals” with respect to the Warrantholder, means, to the extent applicable and
required to permit the Warrantholder to exercise this Warrant for shares of Common Stock and to own
such Common Stock without the Warrantholder being in violation of applicable law, rule or
regulation, the receipt of any necessary approvals and authorizations of, filings and registrations
with, notifications to, or expiration or termination of any applicable waiting period under, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder.

     “SEC” means the U.S. Securities and Exchange Commission.

     “Securities Act” means the Securities Act of 1933, as amended, or any successor statute, and
the rules and regulations promulgated thereunder.

     “Shares” has the meaning set forth in Section 2.

     “trading day” means (A) if the shares of Common Stock are not traded on any national or
regional securities exchange or association or over-the-counter market, a business day or (B) if
the shares of Common Stock are traded on any national or regional securities exchange or
association or over-the-counter market, a business day on which such relevant exchange or

4

 

quotation system is scheduled to be open for business and on which the shares of Common Stock
(i) are not suspended from trading on any national or regional securities exchange or association
or over-the-counter market for any period or periods aggregating one half hour or longer; and
(ii) have traded at least once on the national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of the shares of Common Stock.

     “U.S. GAAP” means United States generally accepted accounting principles.

     “Warrant-holder” has the meaning set forth in Section 2.

     “Warrant” means this Warrant, issued pursuant to the Purchase Agreement.

     2. Number of Shares; Exercise Price. This certifies that, for value received, the
United States Department of the Treasury or its permitted assigns (the “Warrantholder”) is
entitled, upon the terms and subject to the conditions hereinafter set forth, to acquire from the
Company, in whole or in part, after the receipt of all applicable Regulatory Approvals, if any, up
to an aggregate of the number of fully paid and nonassessable shares of Common Stock set forth in
Item 6 of Schedule A hereto, at a purchase price per share of Common Stock equal to the Exercise
Price. The number of shares of Common Stock (the “Shares”) and the Exercise Price are subject to
adjustment as provided herein, and all references to “Common Stock,” “Shares” and “Exercise Price”
herein shall be deemed to include any such adjustment or series of adjustments.

     3. Exercise of Warrant; Term. Subject to Section 2, to the extent permitted by
applicable laws and regulations, the right to purchase the Shares represented by this Warrant is
exercisable, in whole or in part by the Warrantholder, at any time or from time to time after the
execution and delivery of this Warrant by the Company on the date hereof, but in no event later
than 5:00 p.m., New York City time on the tenth anniversary of the Issue Date (the
“Expiration Time”), by (A) the surrender of this Warrant and Notice of Exercise
annexed hereto, duly completed and executed on behalf of the Warrantholder, at the principal
executive office of the Company located at the address set forth in Item 7 of Schedule A hereto (or
such other office or agency of the Company in the United States as it may designate by notice in
writing to the Warrantholder at the address of the Warrantholder appearing on the books of the
Company), and (B) payment of the Exercise Price for the Shares thereby purchased:

          (i) by having the Company withhold, from the shares of Common Stock that would otherwise be
delivered to the Warrantholder upon such exercise, shares of Common stock issuable upon exercise of
the Warrant equal in value to the aggregate Exercise Price as to which this Warrant is so exercised
based on the Market Price of the Common Stock on the trading day on which this Warrant is exercised
and the Notice of Exercise is delivered to the Company pursuant to this Section 3, or

          (ii) with the consent of both the Company and the Warrantholder, by tendering in cash, by
certified or cashier’s check payable to the order of the Company, or by wire transfer of
immediately available funds to an account designated by the Company.

5

 

          If the Warrantholder does not exercise this Warrant in its entirety, the Warrantholder will be
entitled to receive from the Company within a reasonable time, and in any event not exceeding three
business days, a new warrant in substantially identical form for the purchase of that number of
Shares equal to the difference between the number of Shares subject to this Warrant and the number
of Shares as to which this Warrant is so exercised. Notwithstanding anything in this Warrant to
the contrary, the Warrantholder hereby acknowledges and agrees that its exercise of this Warrant
for Shares is subject to the condition that the Warrantholder will have first received any
applicable Regulatory Approvals.

     4. Issuance of Shares; Authorization; Listing. Certificates for Shares issued upon
exercise of this Warrant will be issued in such name or names as the Warrantholder may designate
and will be delivered to such named Person or Persons within a reasonable time, not to exceed three
business days after the date on which this Warrant has been duly exercised in accordance with the
terms of this Warrant. The Company hereby represents and warrants that any Shares issued upon the
exercise of this Warrant in accordance with the provisions of Section 3 will be duly and validly
authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges
(other than liens or charges created by the Warrantholder, income and franchise taxes incurred in
connection with the exercise of the Warrant or taxes in respect of any transfer occurring
contemporaneously therewith). The Company agrees that the Shares so issued will be deemed to have
been issued to the Warrantholder as of the close of business on the date on which this Warrant and
payment of the Exercise Price are delivered to the Company in accordance with the terms of this
Warrant, notwithstanding that the stock transfer books of the Company may then be closed or
certificates representing such Shares may not be actually delivered on such date. The Company will
at all times reserve and keep available, out of its authorized but unissued Common Stock, solely
for the purpose of providing for the exercise of this Warrant, the aggregate number of shares of
Common Stock then issuable upon exercise of this Warrant at any time. The Company will
(A) procure, at its sole expense, the listing of the Shares issuable upon exercise of this Warrant
at any time, subject to issuance or notice of issuance, on all principal stock exchanges on which
the Common Stock is then listed or traded and (B) maintain such listings of such Shares at all
times after issuance. The Company will use reasonable best efforts to ensure that the Shares may
be issued without violation of any applicable law or regulation or of any requirement of any
securities exchange on which the Shares are listed or traded.

     5. No Fractional Shares or Scrip. No fractional Shares or scrip representing
fractional Shares shall be issued upon any exercise of this Warrant. In lieu of any fractional
Share to which the Warrantholder would otherwise be entitled, the Warrantholder shall be entitled
to receive a cash payment equal to the Market Price of the Common Stock on the last trading day
preceding the date of exercise less the pro-rated Exercise Price for such fractional share.

     6. No Rights as Stockholders; Transfer Books. This Warrant does not entitle the
Warrantholder to any voting rights or other rights as a stockholder of the Company prior to the
date of exercise hereof. The Company will at no time close its transfer books against transfer of
this Warrant in any manner which interferes with the timely exercise of this Warrant.

6

 

     7. Charges, Taxes and Expenses. Issuance of certificates for Shares to the
Warrantholder upon the exercise of this Warrant shall be made without charge to the Warrantholder
for any issue or transfer tax or other incidental expense in respect of the issuance of such
certificates, all of which taxes and expenses shall be paid by the Company.

     8. Transfer/Assignment.

          (A) Subject to compliance with clause (B) of this Section 8, this Warrant and all rights
hereunder are transferable, in whole or in part, upon the books of the Company by the registered
holder hereof in person or by duly authorized attorney, and a new warrant shall be made and
delivered by the Company, of the same tenor and date as this Warrant but registered in the name of
one or more transferees, upon surrender of this Warrant, duly endorsed, to the office or agency of
the Company described in Section 3. All expenses (other than stock transfer taxes) and other
charges payable in connection with the preparation, execution and delivery of the new warrants
pursuant to this Section 8 shall be paid by the Company.

          (B) The transfer of the Warrant and the Shares issued upon exercise of the Warrant are
subject to the restrictions set forth in Section 4.4 of the Purchase Agreement. If and for so long
as required by the Purchase Agreement, this Warrant shall contain the legends as set forth in
Sections 4.2(a) and 4.2(b) of the Purchase Agreement.

     9. Exchange and Registry of Warrant. This Warrant is exchangeable, upon the
surrender hereof by the Warrantholder to the Company, for a new warrant or warrants of like tenor
and representing the right to purchase the same aggregate number of Shares. The Company shall
maintain a registry showing the name and address of the Warrantholder as the registered holder of
this Warrant. This Warrant may be surrendered for exchange or exercise in accordance with its
terms, at the office of the Company, and the Company shall be entitled to rely in all respects,
prior to written notice to the contrary, upon such registry.

     10. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company
of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and in the case of any such loss, theft or destruction, upon receipt of a bond, indemnity
or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company shall make and deliver, in lieu of such
lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same aggregate number of Shares as provided for in such lost, stolen,
destroyed or mutilated Warrant.

     11. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall not be a business
day, then such action may be taken or such right may be exercised on the next succeeding day that
is a business day.

     12. Rule 144 Information. The Company covenants that it will use its reasonable best
efforts to timely file all reports and other documents required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations promulgated by the SEC

7

 

thereunder (or, if the Company is not required to file such reports, it will, upon the request
of any Warrantholder, make publicly available such information as necessary to permit sales
pursuant to Rule 144 under the Securities Act), and it will use reasonable best efforts to take
such further action as any Warrantholder may reasonably request, in each case to the extent
required from time to time to enable such holder to, if permitted by the terms of this Warrant and
the Purchase Agreement, sell this Warrant without registration under the Securities Act within the
limitation of the exemptions provided by (A) Rule 144 under the Securities Act, as such rule may be
amended from time to time, or (B) any successor rule or regulation hereafter adopted by the SEC.
Upon the written request of any Warrantholder, the Company will deliver to such Warrantholder a
written statement that it has complied with such requirements.

     13. Adjustments and Other Rights. The Exercise Price and the number of Shares
issuable upon exercise of this Warrant shall be subject to adjustment from time to time as follows;
provided, that if more than one subsection of this Section 13 is applicable to a single event, the
subsection shall be applied that produces the largest adjustment and no single event shall cause an
adjustment under more than one subsection of this Section 13 so as to result in duplication:

          (A) Stock Splits, Subdivisions, Reclassifications or Combinations. If the Company
shall (i) declare and pay a dividend or make a distribution on its Common Stock in shares of Common
Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number
of shares, the number of Shares issuable upon exercise of this Warrant at the time of the record
date for such dividend or distribution or the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Warrantholder after such date shall
be entitled to purchase the number of shares of Common Stock which such holder would have owned or
been entitled to receive in respect of the shares of Common Stock subject to this Warrant after
such date had this Warrant been exercised immediately prior to such date. In such event, the
Exercise Price in effect at the time of the record date for such dividend or distribution or the
effective date of such subdivision, combination or reclassification shall be adjusted to the number
obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this
Warrant before such adjustment and (2) the Exercise Price in effect immediately prior to the record
or effective date, as the case may be, for the dividend, distribution, subdivision, combination or
reclassification giving rise to this adjustment by (y) the new number of Shares issuable upon
exercise of the Warrant determined pursuant to the immediately preceding sentence.

          (B) Certain Issuances of Common Shares or Convertible Securities. Until the earlier
of (i) the date on which the Original Warrantholder no longer holds this Warrant or any portion
thereof and (ii) the third anniversary of the Issue Date, if the Company shall issue shares of
Common Stock (or rights or warrants or other securities exercisable or convertible into or
exchangeable (collectively, a “conversion”) for shares of Common Stock) (collectively, “convertible
securities”) (other than in Permitted Transactions (as defined below) or a

8

 

transaction to which
subsection (A) of this Section 13 is applicable) without consideration or at a consideration per
share (or having a conversion price per share) that is less than 90% of the
Market Price on the last trading day preceding the date of the agreement on pricing such
shares (or such convertible securities) then, in such event:

(A) the number of Shares issuable upon the exercise of this Warrant immediately
prior to the date of the agreement on pricing of such shares (or of such convertible
securities) (the “Initial Number”) shall be increased to the number obtained by
multiplying the Initial Number by a fraction (A) the numerator of which shall be the
sum of (x) the number of shares of Common Stock of the Company outstanding on such
date and (y) the number of additional shares of Common Stock issued (or into which
convertible securities may be exercised or convert) and (B) the denominator of which
shall be the sum of (i) the number of shares of Common Stock outstanding on such
date and (ii) the number of shares of Common Stock which the aggregate consideration
receivable by the Company for the total number of shares of Common Stock so issued
(or into which convertible securities may be exercised or convert) would purchase at
the Market Price on the last trading day preceding the date of the agreement on
pricing such shares (or such convertible securities); and

(B) the Exercise Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Exercise Price in effect immediately prior to the date of the
agreement on pricing of such shares (or of such convertible securities) by a
fraction, the numerator of which shall be the number of shares of Common Stock
issuable upon exercise of this Warrant prior to such date and the denominator of
which shall be the number of shares of Common Stock issuable upon exercise of this
Warrant immediately after the adjustment described in clause (A) above.

     For purposes of the foregoing, the aggregate consideration receivable by the Company in
connection with the issuance of such shares of Common Stock or convertible securities shall be
deemed to be equal to the sum of the net offering price (including the Fair Market Value of any
non-cash consideration and after deduction of any related expenses payable to third parties) of all
such securities plus the minimum aggregate amount, if any, payable upon exercise or conversion of
any such convertible securities into shares of Common Stock; and “Permitted Transactions” shall
mean issuances (i) as consideration for or to fund the acquisition of businesses and/or related
assets, (ii) in connection with employee benefit plans and compensation related arrangements in the
ordinary course and consistent with past practice approved by the Board of Directors, (iii) in
connection with a public or broadly marketed offering and sale of Common Stock or convertible
securities for cash conducted by the Company or its affiliates pursuant to registration under the
Securities Act or Rule 144A thereunder on a basis consistent with capital raising transactions by
comparable financial institutions and (iv) in connection with the exercise of preemptive rights on
terms existing as of the Issue Date. Any adjustment made pursuant to this Section 13(B) shall
become effective immediately upon the date of such issuance.

          (C) Other Distributions. In case the Company shall fix a record date for the making
of a distribution to all holders of shares of its Common Stock of securities, evidences of
indebtedness, assets, cash, rights or warrants (excluding Ordinary Cash Dividends, dividends of its
Common Stock and other dividends or distributions referred to in Section 13(A)), in each

9

 

such case, the Exercise Price in effect prior to such record date shall be reduced immediately
thereafter to the price determined by multiplying the Exercise Price in effect immediately prior to
the reduction by the quotient of (x) the Market Price of the Common Stock on the last trading day
preceding the first date on which the Common Stock trades regular way on the principal national
securities exchange on which the Common Stock is listed or admitted to trading without the right to
receive such distribution, minus the amount of cash and/or the Fair Market Value of the securities,
evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share
of Common Stock (such amount and/or Fair Market Value, the “Per Share Fair Market Value”) divided
by (y) such Market Price on such date specified in clause (x); such adjustment shall be made
successively whenever such a record date is fixed. In such event, the number of Shares issuable
upon the exercise of this Warrant shall be increased to the number obtained by dividing (x) the
product of (1) the number of Shares issuable upon the exercise of this Warrant before such
adjustment, and (2) the Exercise Price in effect immediately prior to the distribution giving rise
to this adjustment by (y) the new Exercise Price determined in accordance with the immediately
preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with,
a regular quarterly cash dividend, the Per Share Fair Market Value would be reduced by the per
share amount of the portion of the cash dividend that would constitute an Ordinary Cash Dividend.
In the event that such distribution is not so made, the Exercise Price and the number of Shares
issuable upon exercise of this Warrant then in effect shall be readjusted, effective as of the date
when the Board of Directors determines not to distribute such shares, evidences of indebtedness,
assets, rights, cash or warrants, as the case may be, to the Exercise Price that would then be in
effect and the number of Shares that would then be issuable upon exercise of this Warrant if such
record date had not been fixed.

          (D) Certain Repurchases of Common Stock. In case the Company effects a Pro Rata
Repurchase of Common Stock, then the Exercise Price shall be reduced to the price determined by
multiplying the Exercise Price in effect immediately prior to the Effective Date of such Pro Rata
Repurchase by a fraction of which the numerator shall be (i) the product of (x) the number of
shares of Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the Market
Price of a share of Common Stock on the trading day immediately preceding the first public
announcement by the Company or any of its Affiliates of the intent to effect such Pro Rata
Repurchase, minus (ii) the aggregate purchase price of the Pro Rata Repurchase, and of which the
denominator shall be the product of (i) the number of shares of Common Stock outstanding
immediately prior to such Pro Rata Repurchase minus the number of shares of Common Stock so
repurchased and (ii) the Market Price per share of Common Stock on the trading day immediately
preceding the first public announcement by the Company or any of its Affiliates of the intent to
effect such Pro Rata Repurchase. In such event, the number of shares of Common Stock issuable upon
the exercise of this Warrant shall be increased to the number obtained by dividing (x) the product
of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment, and
(2) the Exercise Price in effect immediately prior to the Pro Rata Repurchase giving rise to this
adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding
sentence. For the avoidance of doubt, no increase to the Exercise Price or decrease in the number
of Shares issuable upon exercise of this Warrant shall be made pursuant to this Section 13(D).

10

 

          (E) Business Combinations. In case of any Business Combination or reclassification
of Common Stock (other than a reclassification of Common Stock referred to in Section 13(A)), the
Warrantholder’s right to receive Shares upon exercise of this Warrant shall be converted into the
right to exercise this Warrant to acquire the number of shares of stock or other securities or
property (including cash) which the Common Stock issuable (at the time of such Business Combination
or reclassification) upon exercise of this Warrant immediately prior to such Business Combination
or reclassification would have been entitled to receive upon consummation of such Business
Combination or reclassification; and in any such case, if necessary, the provisions set forth
herein with respect to the rights and interests thereafter of the Warrantholder shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be, to the
Warrantholder’s right to exercise this Warrant in exchange for any shares of stock or other
securities or property pursuant to this paragraph. In determining the kind and amount of stock,
securities or the property receivable upon exercise of this Warrant following the consummation of
such Business Combination, if the holders of Common Stock have the right to elect the kind or
amount of consideration receivable upon consummation of such Business Combination, then the
consideration that the Warrantholder shall be entitled to receive upon exercise shall be deemed to
be the types and amounts of consideration received by the majority of all holders of the shares of
common stock that affirmatively make an election (or of all such holders if none make an election).

          (F) Rounding of Calculations; Minimum Adjustments. All calculations under this
Section 13 shall be made to the nearest one-tenth (1/10th) of a cent or to the nearest one-
hundredth (1/100th) of a share, as the case may be. Any provision of this Section 13 to the
contrary notwithstanding, no adjustment in the Exercise Price or the number of Shares into which
this Warrant is exercisable shall be made if the amount of such adjustment would be less than $0.01
or one-tenth (1/10th) of a share of Common Stock, but any such amount shall be carried forward and
an adjustment with respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so carried forward,
shall aggregate $0.01 or 1/10th of a share of Common Stock, or more.

          (G) Timing of Issuance of Additional Common Stock Upon Certain Adjustments. In any
case in which the provisions of this Section 13 shall require that an adjustment shall become
effective immediately after a record date for an event, the Company may defer until the occurrence
of such event (i) issuing to the Warrantholder of this Warrant exercised after such record date and
before the occurrence of such event the additional shares of Common Stock issuable upon such
exercise by reason of the adjustment required by such event over and above the shares of Common
Stock issuable upon such exercise before giving effect to such adjustment and (ii) paying to such
Warrantholder any amount of cash in lieu of a fractional share of Common Stock; provided, however,
that the Company upon request shall deliver to such Warrantholder a due bill or other appropriate
instrument evidencing such Warrantholder’s right to receive such additional shares, and such cash,
upon the occurrence of the event requiring such adjustment.

          (H) Completion of Qualified Equity Offering. In the event the Company (or any
successor by Business Combination) completes one or more Qualified Equity Offerings on or

11

 

prior to December 31, 2009 that result in the Company (or any such successor ) receiving
aggregate gross proceeds of not less than 100% of the aggregate liquidation preference of the
Preferred Shares (and any preferred stock issued by any such successor to the Original
Warrantholder under the CPP), the number of shares of Common Stock underlying the portion of this
Warrant then held by the Original Warrantholder shall be thereafter reduced by a number of shares
of Common Stock equal to the product of (i) 0.5 and (ii) the number of shares underlying the
Warrant on the Issue Date (adjusted to take into account all other theretofore made adjustments
pursuant to this Section 13).

          (I) Other Events. For so long as the Original Warrantholder holds this Warrant or
any portion thereof, if any event occurs as to which the provisions of this Section 13 are not
strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board
of Directors of the Company, fairly and adequately protect the purchase rights of the Warrants in
accordance with the essential intent and principles of such provisions, then the Board of Directors
shall make such adjustments in the application of such provisions, in accordance with such
essential intent and principles, as shall be reasonably necessary, in the good faith opinion of the
Board of Directors, to protect such purchase rights as aforesaid. The Exercise Price or the number
of Shares into which this Warrant is exercisable shall not be adjusted in the event of a change in
the par value of the Common Stock or a change in the jurisdiction of incorporation of the Company.

          (J) Statement Regarding Adjustments. Whenever the Exercise Price or the number of
Shares into which this Warrant is exercisable shall be adjusted as provided in Section 13, the
Company shall forthwith file at the principal office of the Company a statement showing in
reasonable detail the facts requiring such adjustment and the Exercise Price that shall be in
effect and the number of Shares into which this Warrant shall be exercisable after such adjustment,
and the Company shall also cause a copy of such statement to be sent by mail, first class postage
prepaid, to each Warrantholder at the address appearing in the Company’s records.

          (K) Notice of Adjustment Event. In the event that the Company shall propose to take
any action of the type described in this Section 13 (but only if the action of the type described
in this Section 13 would result in an adjustment in the Exercise Price or the number of Shares into
which this Warrant is exercisable or a change in the type of securities or property to be delivered
upon exercise of this Warrant), the Company shall give notice to the Warrantholder, in the manner
set forth in Section 13(J), which notice shall specify the record date, if any, with respect to any
such action and the approximate date on which such action is to take place. Such notice shall also
set forth the facts with respect thereto as shall be reasonably necessary to indicate the effect on
the Exercise Price and the number, kind or class of shares or other securities or property which
shall be deliverable upon exercise of this Warrant. In the case of any action which would require
the fixing of a record date, such notice shall be given at least 10 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 15 days prior to the
taking of such proposed action. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any such action.

          (L) Proceedings Prior to Any Action Requiring Adjustment. As a condition precedent
to the taking of any action which would require an adjustment pursuant to this

12

 

Section 13, the Company shall take any action which may be necessary, including obtaining
regulatory, New York Stock Exchange or stockholder approvals or exemptions, in order that the
Company may thereafter validly and legally issue as fully paid and nonassessable all shares of
Common Stock that the Warrantholder is entitled to receive upon exercise of this Warrant pursuant
to this Section 13.

          (M) Adjustment Rules. Any adjustments pursuant to this Section 13 shall be made
successively whenever an event referred to herein shall occur. If an adjustment in Exercise Price
made hereunder would reduce the Exercise Price to an amount below par value of the Common Stock,
then such adjustment in Exercise Price made hereunder shall reduce the Exercise Price to the par
value of the Common Stock.

     14. Exchange. At any time following the date on which the shares of Common Stock of
the Company are no longer listed or admitted to trading on a national securities exchange (other
than in connection with any Business Combination), the Original Warrantholder may cause the Company
to exchange all or a portion of this Warrant for an economic interest (to be determined by the
Original Warrantholder after consultation with the Company) of the Company classified as permanent
equity under U.S. GAAP having a value equal to the Fair Market Value of the portion of the Warrant
so exchanged. The Original Warrantholder shall calculate any Fair Market Value required to be
calculated pursuant to this Section 14, which shall not be subject to the Appraisal Procedure.

     15. No Impairment. 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, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in taking of all such action
as may be necessary or appropriate in order to protect the rights of the Warrantholder.

     16. Governing Law. This Warrant will be governed by and construed in accordance with
the federal law of the United States if and to the extent such law is applicable, and otherwise in
accordance with the laws of the State of New York applicable to contracts made and to be performed
entirely within such State. Each of the Company and the Warrantholder agrees (a) to submit to the
exclusive jurisdiction and venue of the United States District Court for the District of Columbia
for any action, suit or proceeding arising out of or relating to this Warrant or the transactions
contemplated hereby, and (b) that notice may be served upon the Company at the address in
Section 20 below and upon the Warrantholder at the address for the Warrantholder set forth in the
registry maintained by the Company pursuant to Section 9 hereof. To the extent permitted by
applicable law, each of the Company and the Warrantholder hereby unconditionally waives trial by
jury in any legal action or proceeding relating to the Warrant or the transactions contemplated
hereby or thereby.

     17. Binding Effect. This Warrant shall be binding upon any successors or assigns of
the Company.

13

 

     18. Amendments. This Warrant may be amended and the observance of any term of this
Warrant may be waived only with the written consent of the Company and the Warrantholder.

     19. Prohibited Actions. The Company agrees that it will not take any action which
would entitle the Warrantholder to an adjustment of the Exercise Price if the total number of
shares of Common Stock issuable after such action upon exercise of this Warrant, together with all
shares of Common Stock then outstanding and all shares of Common Stock then issuable upon the
exercise of all outstanding options, warrants, conversion and other rights, would exceed the total
number of shares of Common Stock then authorized by its Charter.

     20. Notices. Any notice, request, instruction or other document to be given
hereunder by any party to the other will be in writing and will be deemed to have been duly given
(a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt,
or (b) on the second business day following the date of dispatch if delivered by a recognized next
day courier service. All notices hereunder shall be delivered as set forth in Item 8 of Schedule A
hereto, or pursuant to such other instructions as may be designated in writing by the party to
receive such notice.

     21. Entire Agreement. This Warrant, the forms attached hereto and Schedule A hereto
(the terms of which are incorporated by reference herein), and the Letter Agreement (including all
documents incorporated therein), contain the entire agreement between the parties with respect to
the subject matter hereof and supersede all prior and contemporaneous arrangements or undertakings
with respect thereto.

[Remainder of page intentionally left blank]

14

 

[Form of Notice of Exercise]

Date:                     

			
	TO:	 	Royal Bancshares of Pennsylvania, Inc.

			
	RE:	 	Election to Purchase Common Stock

     The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees
to subscribe for and purchase the number of shares of the Common Stock set forth below covered by
such Warrant. The undersigned, in accordance with Section 3 of the Warrant, hereby agrees to pay
the aggregate Exercise Price for such shares of Common Stock in the manner set forth below. A new
warrant evidencing the remaining shares of Common Stock covered by such Warrant, but not yet
subscribed for and purchased, if any, should be issued in the name set forth below.

Number of Shares of Common Stock                                                             

Method of Payment of Exercise Price (note if cashless exercise pursuant to Section 3(i) of the
Warrant or cash exercise pursuant to Section 3(ii) of the Warrant, with consent of the Company and
the Warrantholder)                                                             

Aggregate Exercise Price:                                                             

	 	 	 	 	 	 	 
	 

	 	Holder:	 	 	 	 
	 

	 	By:
	 	 

	 	 
	 

	 	Name:
	 	 

	 	 
	 

	 	Title:
	 	 

	 	 
	 

	 	 	 	 

	 	 

15

 

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

Dated: February 20, 2009

	 	 	 	 	 
	 	COMPANY: ROYAL BANCSHARES OF PENNSYLVANIA

 	 
	 	By:  	/s/  James J. McSwiggan, Jr.
 	 
	 	 	Name:  	James J. McSwiggan, Jr. 	 
	 	 	Title:  	President and Chief Operating Officer 	 
	 
	 	Attest:

 	 
	 	By:  	/s/  Robert A. Kuehl
 	 
	 	 	Name:  	Robert A. Kuehl 	 
	 	 	Title:  	Chief Financial Officer 	 
	 

[Signature Page to Warrant]

16

 

SCHEDULE A

Item 1

Name: Royal Bancshares of Pennsylvania, Inc.

Corporate or other organizational form: Business corporation

Jurisdiction of organization: Commonwealth of Pennsylvania

Item 2 

Exercise Price: $4.13

Item 3

Issue Date: February 20, 2009

Item 4 

Amount of last dividend declared prior to the Issue Date: $0.15

Item 5 

Date of Letter Agreement between the Company and the United States Department of the Treasury:
February 20, 2009

Item 6 

Number of shares of Common Stock: 1,104,370

Item 7 

Company’s address:

Royal Bancshares of Pennsylvania, Inc.

732 Montgomery Avenue

Narberth, Pennsylvania 19072

Item 8 

Notice information:

If to the Company:

Royal Bancshares of Pennsylvania, Inc.

732 Montgomery Avenue

Narberth, Pennsylvania 19072

Attention: James J. McSwiggan, Jr., President and COO

Facsimile: (610) 668-1185

17

 

With a copy to:

Stevens & Lee

111 North Sixth Street

Reading, Pennsylvania 19603

Attention: David W. Swartz, Esquire

Facsimile: (610) 988-0815

If to the Warrantholder:

United States Department of the Treasury

1500 Pennsylvania Avenue, NW, Room 2312

Washington, DC 20220

Attention: Assistant General Counsel (Banking and Finance)

Facsimile: (202) 622-1974

18

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