**Exhibit 10.25**

 

 

**8% CONVERTIBLE SECURED PROMISSORY NOTE**

 

**THISPROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, ASAMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERREDOR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENTOR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS.**

 

FOR VALUE RECEIVED, ALLIANCE PHARMACEUTICALCORP., a New York corporation (the “Company”), hereby promises to pay to theorder of Photogen Technologies, Inc. (the “Holder”), at 140 Union Square Drive,New Hope, PA 18938, the principal amount of($            ) inlawful money of the United States of America, on the terms set forth insection 2 hereof.  This Note isbeing issued by the Company along with similar convertible notes alsodesignated as 8% Convertible Secured Promissory Notes (the “Other Notes,” andtogether with this Note, the “Notes”) pursuant to that certain ConvertibleSecured Note Purchase Agreement, dated October 4, 2002, between the Company andthe other signatories thereto (the “Purchase Agreement”).  The obligations under the Notes are securedby a priority security interest in certain assets of the Company (the“Collateral”) pursuant to the Imagent Security Agreement, dated as ofOctober 4, 2002 (the “Security Agreement”), made by the Company to theCollateral Agent (as defined in the Purchase Agreement) for the benefit of theHolders (as defined below), the General Collateral Security Agreement, dated asof October 4, 2002 (the “General Collateral Security Agreement”) made bythe Company to the Collateral Agent for the benefit of the Holders and theImagent and Oxygent Patent and Trademark Security Agreement, dated as ofOctober 4, 2002 (the “Patent and Trademark Security Agreement”) made bythe Company to the Collateral Agent for the benefit of the Holders.

 

**1.****                                      Definitions.**  Thefollowing terms shall have the meanings ascribed to them below:

 

“Business Day” means any day, otherthan a Saturday or Sunday or a day on which banking institutions in the Stateof New York are authorized or obligated by law, regulation or executive orderto close.

 

“Conversion Amount” means the portionof the principal amount of this Note being converted plus any accrued andunpaid interest thereon through the Conversion Date each as specified in thenotice of conversion in the form attached as Exhibit 1 hereto (the “Noticeof Conversion”).

 

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“ConversionDate” means, for any conversion, the date specified in the Notice ofConversion so long as the copy of the Notice of Conversion is faxed (ordelivered by other means resulting in notice) to the Company at or before 11:59p.m., New York City time, on the Conversion Date indicated in the Notice ofConversion; provided, however, that if the Notice of Conversion is not so faxedor otherwise delivered before such time, then the Conversion Date shall be thedate the Holder faxes or otherwise delivers the Notice of Conversion to theCompany.

 

“ConversionPrice” shall mean $0.35 per share of common stock of the Company, subjectto adjustment as set forth herein.

 

“DailyMarket Price” means, as of any date of determination, the daily volumeweighted average sale price for the Common Stock (as defined below), for theTrading Day immediately preceding such date of determination (subject toequitable adjustment for any stock splits, stock dividends, reclassificationsor similar events during such trading day and further shall be subject toadjustment as provided herein) on the principal United States securitiesexchange or trading market where the Common Stock is listed or traded asreported by Bloomberg, or if the foregoing does not apply, the volume weightedaverage price for the Common Stock in the OTC Bulletin Board for such securityas reported by Bloomberg, or, if no sale price is reported for such security byBloomberg, the volume weighted average of the bid prices of any market makersfor such security as reported in the “pink sheets” by the Pink Sheets LLC, ineach case for such date or, if such date was not a Trading Day for suchsecurity, on the next preceding date which was a Trading Day.  For the avoidance of doubt, the Trading Dayimmediately preceding any Conversion Date is the last calendar day that is aTrading Day and which is immediately preceding the Conversion Date.  If the Daily Market Price cannot becalculated for such security as of either of such dates on any of the foregoingbases, the Daily Market Price of such security on such date shall be the fairmarket value as reasonably determined by an investment banking firm selected bythe Company and reasonably acceptable to the Holders of a majority of theprincipal amount and interest of the Notes outstanding, with the costs of suchappraisal to be borne by the Company.

 

“TradingDay” means any day on which the principal United States securities exchangeor trading market where the Common Stock (as defined below) is then listed ortraded, is open for trading.

 

**2.****                                      Paymentsof Interest and Principal.** Subject to the provisions of section 3 below, payments of principalplus interest on the unpaid principal balance of this Promissory Note (this“Note”) outstanding from time to time shall be payable in accordance with thefollowing:

 

(a)                                  Interest.  During the period commencing on the datehereof and terminating on the Maturity Date (as defined herein), interest onthe unpaid principal amount of this Note shall accrue at a rate equal to 8% perannum, computed on the basis of actual days elapsed over a 360-day year, andshall be payable semi-annually (commencing on March 30, 2003) up to andincluding the Maturity Date (as defined below).

 

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(b)                                 Principal.  The principal balance outstanding on thisNote shall be due and payable to the Holder on October 15, 2004 (the “MaturityDate”).  Contemporaneously with therepayment of this Note, the Holder shall surrender this Note, duly endorsed, atthe office of the Company.

 

(c)                                  Payments.  Except as provided in section 2(d)below, all payments of principal, interest, fees and other amounts duehereunder shall be made by the Company in lawful money of the United States ofAmerica by wire transfer or by any other method approved in advance by theHolder to the account of the Holder at the address of the Holder set forth insection 10 hereof or at such other place designated by the Holder inwriting to the Company.

 

(d)                                 PaymentShares.  (i) The Company, at itselection, may make any payment of interest on this Note wholly or partly inshares of the Company’s common stock (the “Common Stock”), par value $0.01 pershare (the “Payment Shares”).  If theCompany elects to use Payment Shares it shall provide the Holder with notice ofsuch election at least ten (10) days prior to the applicable interest paymentdate.  On the interest payment date, theCompany shall deliver to the Holder the number of Payment Shares equal to thequotient obtained by dividing (A) 120% of the cash interest payment amount by(B) the Payment Share Value (as defined below).  Notwithstanding the above, if the Payment Share Value shall beless than the Conversion Price, the Company shall not be permitted to usePayment Shares to make an interest payment and shall be required to make suchinterest payment in lawful money of the United States of America as provided insection 2(c) above.

 

(ii)                                  Valueof Payment Shares.  The PaymentShares shall be valued at 100% of the average closing bid price of theCompany’s Common Stock on the Nasdaq Stock Market, Inc. National Market System(“Nasdaq”) or such other securities exchange or other market on which theCommon Stock is trading, as reported by Bloomberg, L.P., for the twenty (20)trading days ending on the trading day prior to the applicable interest paymentdate.  Such value shall be referred toherein as the “Payment Share Value.”

 

(iii)                               PaymentShares Validly Issued.  The PaymentShares, when issued pursuant to and in compliance with thissection 2(d)(iii), shall be, and for all purposes shall be deemed to be,validly issued, fully paid and nonassessable shares of Common Stock; theissuance and delivery thereof is in all respects hereby authorized; and theissuance thereof, together with lawful money of the United States of America,if any, paid in lieu of fractional shares of Common Stock, will be, and for allpurposes shall be deemed to be, in full discharge and satisfaction of theCompany’s obligation to pay the interest on this Note to which such PaymentShares relate.

 

(iv)                              Registrationof Payment Shares.  All PaymentShares shall be registered under the Securities Act of 1933 and free of allrestriction on resales.

 

(v)                                 ElectronicTransmission of Payment Shares.  Ifthe Company’s transfer agent is participating in the Depository Trust Company(“DTC”) Fast Automated Securities Transfer program, and so long as thecertificates therefor do not bear a legend and the Holder thereof is not thenrequired to return such certificate for the placement of a legend thereon, theCompany shall cause its transfer agent to electronically transmit the Payment

 

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Shares to the Holder bycrediting the account of the Holder or its nominee with DTC through its DepositWithdrawal Agent Commission system (“DTC Transfer”).  If the aforementioned conditions to a DTC Transfer are notsatisfied, the Company shall deliver to the Holder physical certificatesrepresenting the Payment Shares. Further, the Holder may instruct the Company to deliver to the Holderphysical certificates representing the Payment Shares in lieu of deliveringsuch shares by way of DTC Transfer.

 

(e)                                  Accelerationof the Maturity Date. Notwithstanding any other provision in this Note to the contrary, thisNote shall become due and payable together with all accrued interest due on theoutstanding principal amount hereunder, at the option of the Holder exercisedby written notice to the Company, in the case of clauses (i) to (ix) below andwithout notice or any other action by Holder in the case of clauses (x) to(xii) below, in the event that (i) the Company fails to pay the principal of orinterest on this Note as and when due; (ii) the Company shall default in theperformance of or otherwise breach any of its representations and warranties orother obligations set forth in the Convertible Secured Note Purchase Agreement,dated as of the date hereof (the “Purchase Agreement”), between the Company andthe Holder and the holders (together with the Holder, the “Holders”) of theother notes issued pursuant to the Purchase Agreement (the “Other Notes”) orany of the Transaction Documents (as defined in the Purchase Agreement), and ifsuch default is capable of cure, such default remains uncured beyond anyapplicable cure period; (iii) the Holder shall not have the right to enforceits remedies under section 8 of the Security Agreement, section 9 ofthe General Collateral Security Agreement, or section 7 of the Patent andTrademark Security Agreement; (iv) the Holder shall not have a perfectedsecurity interest in the Collateral (as defined, and pursuant to the terms setforth, in the Security Agreement, the General Collateral Security Agreement andthe Patent and Trademark Security Agreement) (v) the Company’s Common Stock(including any Conversion Shares or Payment Shares once registered under theSecurities Act of 1933) is suspended from trading on any of, or is not listed(and authorized) for trading on at least one of, the New York Stock Exchange,the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCapMarket or is not eligible for trading on the OTC Bulletin Board for anaggregate of 10 trading days in any nine month period; (vi) the Company failsto remove any restrictive legend of any certificate or any Conversion Sharesissued to the Holders of the Notes upon conversion of any of the Notes as andwhen required by this Note, or the Purchase Agreement, and any such failurecontinues uncured for ten (10) business days after the Company has beennotified thereof in writing by the Holder; (vii) the Company fails to pay, whendue, or within any applicable grace period, any payment with respect to anyindebtedness of the Company in excess of $500,000 due to any third party(including, without limitation, any of the Other Notes), other than paymentscontested by the Company in good faith, or otherwise is in breach or violationof any agreement for monies owed or owing in an amount in excess of $500,000which breach or violation permits the other party thereto to declare a defaultor otherwise accelerate amounts due thereunder; (viii) the entry of a finaljudgment against the Company, which is not subject to appeal by the Company, inan amount in excess of $500,000, or the attachment or seizure of or levy uponany property of the Company to satisfy an obligation of the Company; (ix) theCompany provides notice to any Holder of the Notes, including by way of publicannouncement, at any time, of its intention not to issue, or otherwise refusesto issue, Conversion Shares to any Holder of the Note upon conversion inaccordance with the terms of the Notes (other than due to the circumstancescontemplated by section 3(h) and section 4 for which the Holdersshall have the remedies set forth therein); (x) the Company shall file apetition under bankruptcy,

 

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insolvency or debtor’s relieflaw or make an assignment for the benefit of its creditors; (xi) proceedingsshall be instituted against the Company before a court of competentjurisdiction under any federal or state bankruptcy law that (X) is for reliefagainst the Company in an involuntary case brought with respect to the Companyin such court, (Y) seeks to appoint a custodian, receiver or other similarofficial for all or substantially all the Company’s property or (Z) seeks toliquidate the Company, and such proceedings remain unstayed and in effect forsixty (60) days; or (xii) an Event of Default occurs and is continuing underthe Security Agreement, the General Collateral Security Agreement, or theImagent and Oxygent Patent and Trademark Security Agreement.  In the event that the payment of principaland interest due hereunder is accelerated pursuant to subsection 2(e),interest shall continue to accrue at 18% per annum as of the date of suchacceleration until such date as the Holder is paid in full under this Note.

 

**3.****                                      Conversion.**

 

(a)          Conversionat the Option of the Holder. Subject to the limitations on conversions contained in section 3(h)and section 4 the Holder may, at any time and from time to time on orafter the date hereof, convert all or any part of the outstanding principalamount of this Note, plus all accrued interest thereon through the ConversionDate, into a number of fully paid and nonassessable shares of Common Stock(“Conversion Shares”) upon payment of the Conversion Price.  The number of shares of Common Stockissuable upon payment of the Conversion Price shall be determined in accordancewith the following formula:

 

Conversion Amount

Conversion Price

 

(b)         Mechanicsof Conversion.  In order to effect aconversion pursuant to this section 3, the Holder shall: (a) fax (orotherwise deliver) a copy of the fully executed Notice of Conversion to theCompany or the transfer agent for the Common Stock and (b) surrender or causeto be surrendered this Note, duly endorsed, along with a copy of the Notice ofConversion as soon as practicable thereafter to the Company or the transferagent.  Upon receipt by the Company of afacsimile copy of a Notice of Conversion from a Holder, the Company shallimmediately send, via facsimile, a confirmation to such Holder stating that theNotice of Conversion has been received, the date upon which the Company expectsto deliver the Conversion Shares issuable upon such conversion and the name andtelephone number of a contact person at the Company regarding the conversion.  The Company shall not be obligated to issueConversion Shares upon a conversion unless either this Note is delivered to theCompany or the transfer agent as provided above, or the Holder notifies theCompany or the transfer agent that such certificates have been lost, stolen ordestroyed and delivers the documentation to the Company required bysection 13.

 

(c)          Deliveryof Conversion Shares Upon Conversion. Upon the surrender of this Note accompanied by a Notice of Conversion,the Company shall, no later than the later of (a) the second business dayfollowing the Conversion Date and (b) the business day following the date ofsuch surrender (or, in the case of lost, stolen or destroyed certificates,after provision of indemnity pursuant to section 13) (the “Delivery Period”),issue and deliver to the Holder or its nominee (x) that number of ConversionShares issuable upon conversion of the portion of this Note being converted and(y) a new Note in the form hereof representing the

 

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balance of the principal amounthereof not being converted, if any.  Ifthe Company’s transfer agent is participating in the DTC Fast AutomatedSecurities Transfer program, and so long as the certificates therefor do notbear a legend and the Holder thereof is not then required to return suchcertificate for the placement of a legend thereon, the Company shall cause itstransfer agent to electronically transmit the Conversion Shares to the Holderby crediting the account of the Holder or its nominee with DTC through its DTCTransfer.  If the aforementionedconditions to a DTC Transfer are not satisfied, the Company shall deliver tothe Holder physical certificates representing the Conversion Shares.  Further, the Holder may instruct the Companyto deliver to the Holder physical certificates representing the ConversionShares in lieu of delivering such shares by way of DTC Transfer.

 

(d)         Adjustmentto Conversion Price.  The ConversionPrice in effect at any time shall be subject to adjustment from time to timeupon the happening of certain events, as follows:

 

(i)                                     CommonStock Dividends; Common Stock Splits; Reverse Common Stock Splits.  If the Company, at any time while this Noteis outstanding, (A) shall pay a stock dividend on its Common Stock, (B)subdivide outstanding shares of Common Stock into a larger number of shares, or(C) combine outstanding shares of Common Stock into a smaller number of shares,the Conversion Price shall be multiplied by a fraction the numerator of whichshall be the number of shares of Common Stock (excluding treasury shares, ifany) outstanding before such event and the denominator of which shall be thenumber of shares of Common Stock outstanding after such event.  Any adjustment made pursuant to thissection 3(d)(i) shall become effective immediately after the record datefor the determination of stockholders entitled to receive such dividend ordistribution and shall become effective immediately after the effective date inthe case of a subdivision, combination or re-classification.  Notwithstanding the foregoing, if theCompany shall combine outstanding shares of Common Stock into a smaller numberof shares at any time prior to the Maturity Date, then the Conversion Price ineffect immediately prior to such reverse stock split shall not be adjusted andshall remain in effect after giving effect to such reverse stock split.

 

(ii)                                  SubscriptionRights.  If the Company, at any timewhile this Note is outstanding, shall fix a record date for the distribution toall of the Holders of Common Stock evidence of its indebtedness or assets orrights, options, warrants or other securities entitling them to subscribe for,purchase, convert to, exchange for or to otherwise acquire any security(excluding those referred to in section 3(d)(i) above), then in each suchcase the Conversion Price at which this Note shall thereafter be exercisableshall be determined by multiplying the Conversion Price in effect immediatelyprior to the record date fixed for determination of shareholders entitled toreceive such distribution by a fraction, the denominator of which shall be theclosing bid price of the Common Stock determined as of the record datementioned above, and the numerator of which shall be such closing bid price ofthe Common Stock on such record date less the then fair market value at suchrecord date of the portion of such assets or evidence of indebtedness sodistributed applicable to one outstanding share of Common Stock as determinedby the Board of Directors in good faith; provided, however, that in the eventof a distribution exceeding twenty percent (20%) of the net assets of theCompany, such fair market value shall be determined by an appraiser selected ingood faith by the Holder; and provided, further, that the Company, afterreceipt of the determination by such appraiser

 

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shall have the right to selectan additional appraiser meeting the same qualifications, in good faith, inwhich case the fair market value shall be equal to the average of thedeterminations by each such appraiser. The Company shall pay for all such appraisals.  Such adjustment shall be made whenever any such distribution is madeand shall become effective immediately after the record date mentioned above.

 

(iii)                               OtherEvents.  In case of (A) anyreclassification of the Common Stock into other securities of the Company, (B)any compulsory share exchange pursuant to which the Common Stock is convertedinto other securities, cash or property or (C) any merger or consolidation as aresult of which the holders of the Common Stock immediately prior thereto donot hold a majority of the shares of Common Stock of the surviving corporationimmediately thereafter, or any sale or other disposition of all or substantiallyall of the assets of the Company (each of (A), (B) or (C), an “ExtraordinaryEvent”), the Holder shall have the right thereafter to convert this Note intoshares of stock and other securities, cash and property receivable upon ordeemed to be held by holders of Common Stock following such ExtraordinaryEvent, that the Holder would have been entitled to receive had it convertedthis Note immediately prior to such Extraordinary Event (without taking intoaccount any limitations or restrictions on the convertibility of theNotes).  In the case of an ExtraordinaryEvent, the terms of any such Extraordinary Event shall include such terms so asto continue to give to the Holder the right to receive the securities, cash orproperty set forth in this section 3(d)(iii) upon any conversion followingsuch Extraordinary Event.  Thisprovision shall similarly apply to successive Extraordinary Events.  For the avoidance of doubt, nothing containedin this clause (iii) shall be construed to impair the Holders rights undersection 5.

 

(iv)                              Exceptas provided in subsection (v) hereof, if and whenever the Company shallissue or sell, or is, in accordance with any of subsections (iv)(A) through(iv)(H) hereof, deemed to have issued or sold, any Additional Shares of CommonStock for a consideration per share less than the Conversion Price in effectimmediately prior to the time of such issue or sale, then and in each such case(a “Trigger Issuance”) the then-existing exercise price per share shallbe reduced, as of the close of business on the effective date of the TriggerIssuance, to the lowest price per share at which any share of Common Stock wasissued or sold or deemed to be issued or sold in the Trigger Issuance;provided, however, that in no event shall the Conversion Price after givingeffect to such Trigger Issuance be greater than the Conversion Price in effectprior to such Trigger Issuance.

 

For purposesof this subsection (iv), “Additional Shares of Common Stock” shall meanall shares of Common Stock issued by the Company or deemed to be issuedpursuant to this subsection (iv), other than Excluded Issuances (asdefined in subsection (v) hereof).

 

For purposesof this subsection (iv), the following subsections (iv)(A) to (iv)(H)shall also be applicable (subject, in each such case, to the provisions ofsubsection (v) hereof) and to each other subsection contained in thissubsection (iv):

 

(A)  Issuance of Rights orOptions.  In case at any time theCompany shall in any manner grant (directly and not by assumption in a mergeror otherwise) any warrants or other rights to subscribe for or to purchase, orany options for the purchase of, Common Stock or any stock or securityconvertible into or

 

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exchangeablefor Common Stock (such warrants, rights or options being called “Options” andsuch convertible or exchangeable stock or securities being called “ConvertibleSecurities”) whether or not such Options or the right to convert or exchangeany such Convertible Securities are immediately exercisable, and the price pershare for which Common Stock is issuable upon the exercise of such Options orupon the conversion or exchange of such Convertible Securities (determined bydividing (i) the sum (which sum shall constitute the applicable consideration)of (x) the total amount, if any, received or receivable by the Company asconsideration for the granting of such Options, plus (y) the aggregate amountof additional consideration payable to the Company upon the exercise of all suchOptions, plus (z), in the case of such Options which relate to ConvertibleSecurities, the aggregate amount of additional consideration, if any, payableupon the issue or sale of such Convertible Securities and upon the conversionor exchange thereof, by (ii) the total maximum number of shares of Common Stockissuable upon the exercise of such Options or upon the conversion or exchangeof all such Convertible Securities issuable upon the exercise of such Options)shall be less than the Conversion Price in effect immediately prior to the timeof the granting of such Options, then the total number of shares of CommonStock issuable upon the exercise of such Options or upon conversion or exchangeof the total amount of such Convertible Securities issuable upon the exerciseof such Options shall be deemed to have been issued for such price per share asof the date of granting of such Options and thereafter shall be deemed to beoutstanding for purposes of adjusting the Conversion Price.  Except as otherwise provided insubsection (iv)(D), no adjustment of the Conversion Price shall be madeupon the actual issue of such Common Stock or of such Convertible Securitiesupon exercise of such Options or upon the actual issue of such Common Stockupon conversion or exchange of such Convertible Securities.

 

(B)  Issuance of ConvertibleSecurities.  In case the Companyshall in any manner issue (directly and not by assumption in a merger orotherwise) or sell any Convertible Securities, which Convertible Securities donot have a fluctuating conversion or exercise price or exchange ratio, whetheror not the rights to exchange or convert any such Convertible Securities areimmediately exercisable, and the price per share for which Common Stock isissuable upon such conversion or exchange (determined by dividing (i) the sum(which sum shall constitute the applicable consideration) of (x) the totalamount received or receivable by the Company as consideration for the issue orsale of such Convertible Securities, plus (y) the aggregate amount ofadditional consideration, if any, payable to the Company upon the conversion orexchange thereof, by (ii) the total number of shares of Common Stock issuableupon the conversion or exchange of all such Convertible Securities) shall be lessthan the Conversion Price in effect immediately prior to the time of such issueor sale, then the total maximum number of shares of Common Stock issuable uponconversion or exchange of all such Convertible Securities shall be deemed tohave been issued for such price per share as of the date of the issue or saleof such Convertible Securities and thereafter shall be deemed to be outstandingfor purposes of

 

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adjusting theConversion Price, provided that (a) except as otherwise provided insubsection (iv)(D), no adjustment of the Conversion Price shall be madeupon the actual issuance of such Common Stock upon conversion or exchange ofsuch Convertible Securities and (b) no further adjustment of the ConversionPrice shall be made by reason of the issue or sale of Convertible Securitiesupon exercise of any Options to purchase any such Convertible Securities forwhich adjustments of the Conversion Price have been made pursuant to the otherprovisions of subsection (iv).

 

(C)  Issuance of VariableRate Convertible Security.  If theCompany in any manner issues or sells any Convertible Securities with afluctuating conversion or exercise price or exchange ratio (a “Variable RateConvertible Security”), then the “price per share for which Common Stock isissuable upon such conversion or exchange” for purposes of the calculationcontemplated by section 3(d)(iv)(B) shall be deemed to be the lowest priceper share which would be applicable (assuming all holding period and otherconditions to any discounts contained in such Variable Rate ConvertibleSecurity have been satisfied) if the Conversion Price on the date of issuanceof such Variable Rate Convertible Security was 75% of the Conversion Price onsuch date (the “Assumed Variable Market Price”).  Further, if the Conversion Price at any time or times thereafteris less than or equal to the Assumed Variable Market Price last used for makingany adjustment under this section 3(d)(iv) with respect to any VariableRate Convertible Security, the Conversion Price in effect at such time shall bereadjusted to equal the Conversion Price which would have resulted if theAssumed Variable Market Price at the time of issuance of the Variable RateConvertible Security had been 75% of the Daily Market Price existing at thetime of the adjustment required by this sentence.

 

(D)  Change in Option Priceor Conversion Rate.  Upon thehappening of any of the following events, namely, if the purchase priceprovided for in any Option referred to in subsection (iv)(A) hereof, theadditional consideration, if any, payable upon the conversion or exchange ofany Convertible Securities referred to in subsections (iv)(A) or (iv)(B), orthe rate at which Convertible Securities referred to in subsections (iv)(A) or(iv) (B) are convertible into or exchangeable for Common Stock shall change atany time (including, but not limited to, changes under or by reason ofprovisions designed to protect against dilution), the Conversion Price ineffect at the time of such event shall forthwith be readjusted to theConversion Price which would have been in effect at such time had such Optionsor Convertible Securities still outstanding provided for such changed purchaseprice, additional consideration or conversion rate, as the case may be, at thetime initially granted, issued or sold. On the termination of any Option for which any adjustment was madepursuant to this subsection (iv) or any right to convert or exchangeConvertible Securities for which any adjustment was made pursuant to thissubsection (iv) (including without limitation upon the redemption orpurchase for consideration of Convertible Securities by the Company), theConversion Price then in effect hereunder shall forthwith be changed to theConversion Price which would have been in effect at the time of

 

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suchtermination had such Option or Convertible Securities, to the extentoutstanding immediately prior to such termination, never been issued.

 

(E)  Calculation ofConsideration Received. If any Common Stock, Options or ConvertibleSecurities are issued, granted or sold for cash, the consideration receivedtherefor will be the amount received by the Company therefor, after deductionof all underwriting discounts or allowances in connection with such issuance,grant or sale.  In case any CommonStock, Options or Convertible Securities are issued or sold for a considerationpart or all of which shall be other than cash, including in the case of a strategicor similar arrangement in which the other entity will provide services to theCompany, purchase services from the Company or otherwise provide intangibleconsideration to the Company, the amount of the consideration other than cashreceived by the Company (including the net present value of the considerationexpected by the Company for the provided or purchased services) will be thefair market value of such consideration, except where such considerationconsists of securities, in which case the amount of consideration received bythe Company will be the Daily Market Price with respect to such securitiesthereof as of the date of receipt. In case any Common Stock, Options orConvertible Securities are issued in connection with any merger or consolidationin which the Company is the surviving Company, the amount of considerationtherefor will be deemed to be the fair market value of such portion of the netassets and business of the non-surviving Company as is attributable to suchCommon Stock, Options or Convertible Securities, as the case may be.Notwithstanding anything else herein to the contrary, if Common Stock, Optionsor Convertible Securities are issued, granted or sold in conjunction with eachother as part of a single transaction or in a series of related transactions,any Holder of the Notes may elect to determine the amount of considerationdeemed to be received by the Company therefor by deducting the fair value ofany type of securities (the “Disregarded Securities”) issued, granted or soldin such transaction or series of transactions. If the Holder makes an electionpursuant to the immediately preceding sentence, no adjustment to the ConversionPrice shall be made pursuant to this subsection (iv)(E) for the issuanceof the Disregarded Securities or upon any conversion or exercise thereof. Forexample, if the Company were to issue convertible notes having a face value of$1,000,000 and warrants to purchase shares of Common Stock at an exercise priceequal to the market price of the Common Stock on the date of issuance of suchwarrants in exchange for $1,000,000 of consideration, the fair value of thewarrants would be subtracted from the $1,000,000 of consideration received bythe Company for the purposes of determining whether the shares of Common Stockissuable upon conversion of the convertible notes shall be deemed to be issuedat a price per share below market price and, if so, for purposes of determiningany adjustment to the Conversion Price hereunder as a result of the issuance ofthe Convertible Securities.  The Companyshall calculate, using standard commercial valuation methods appropriate forvaluing such assets, the fair market value of any consideration other than cashor securities; provided, however, that if the Holder hereof does not agree tosuch fair market value

 

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calculationwithin three business days after receipt thereof from the Company, then suchfair market value will be determined in good faith by an investment banker orother appropriate expert of national reputation selected by the Company andreasonably acceptable to the Holders of a majority of the principal andinterest outstanding under the Notes, with the costs of such appraisal to beborne by the Company.

 

(F)  Other Action AffectingConversion Price. If the Company takes any action affecting the CommonStock after the date hereof that would be covered by this section 3, butfor the manner in which such action is taken or structured, which would in anyway diminish the value of the Notes then the Conversion Price shall be adjustedin such manner as the Board of Directors of the Company shall in good faithdetermine to be equitable under the circumstances.

 

(G)  Record Date. In casethe Company shall take a record of the holders of its Common Stock for thepurpose of entitling them (i) to receive a dividend or other distributionpayable in Common Stock, Options or Convertible Securities or (ii) to subscribefor or purchase Common Stock, Options or Convertible Securities, then suchrecord date shall be deemed to be the date of the issue or sale of the sharesof Common Stock deemed to have been issued or sold upon the declaration of suchdividend or the making of such other distribution or the date of the granting ofsuch right of subscription or purchase, as the case may be, provided, however,that any such adjustment in the Conversion Price shall be reversed or shall notbecome effective, as applicable, if the Company abandons the action to whichthe record date pertains.

 

(H)  Treasury Shares. Thenumber of shares of Common Stock outstanding at any given time shall notinclude shares owned or held by or for the account of the Company or any of itswholly-owned subsidiaries, and the disposition of any such shares (other thanthe cancellation or retirement thereof) shall be considered an issue or sale ofCommon Stock for the purpose of this subsection (iv).

 

(v)                                 Anythingherein to the contrary notwithstanding, the Company shall not be required tomake any adjustment of the Conversion Price in the case of the issuance of (A)capital stock, Options or Convertible Securities issued to directors, officers,employees or consultants of the Company in connection with their service asdirectors of the Company, their employment by the Company or their retention asconsultants by the Company pursuant to an equity compensation program approvedby the Board of Directors of the Company or the compensation committee of theBoard of Directors of the Company and consistent with past practice, or (B)shares of Common Stock upon the conversion or exercise of Options orConvertible Securities issued prior to the date hereof, and (C) shares ofCommon Stock issued or issuable by reason of a dividend, stock split or otherdistribution on shares of Common Stock (but only to the extent that such adividend, split or distribution results in an adjustment in the ConversionPrice pursuant to the other provisions of this Note) (collectively, “ExcludedIssuances”).

 

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(e)                                  Covenants.

 

(i)                                     Reservationof Conversion Shares.  The Companycovenants that it will at all times reserve and keep available out of itsauthorized shares of Common Stock, free from preemptive rights, solely for thepurpose of issue upon conversion of the Notes and issuances of shares of CommonStock in accordance with section 2(d) as herein provided, the ConversionShares and Payment Shares.  The Companycovenants that the Conversion Shares and any Payment Shares shall, when issued,be duly and validly issued and fully paid and non-assessable.

 

(ii)                                  RequiredRegistration.  The Company covenantsthat if any Conversion Shares or Payment Shares require registration with orapproval of any governmental authority under any Federal or state law, or anynational securities exchange, before such shares may be issued upon conversion,the Company will use its best efforts to cause such shares to be dulyregistered or approved, as the case may be.

 

(f)                                    FractionalShares.  Upon a conversion hereunderor in connection with the payment of interest in Payment Shares, the Companyshall not be required to issue stock certificates representing fractions ofshares of the Common Stock, but may if otherwise permitted, make a cash paymentin respect of any final fraction of a share based on the closing bid price atsuch time.  If the Company elects not,or is unable, to make such a cash payment, the Holder shall be entitled toreceive, in lieu of the final fraction of a share, one whole share of CommonStock.

 

(g)                                 Noticeof Adjustments.  Upon the occurrenceof each adjustment or readjustment of the Conversion Price pursuant tosection 3, the Company, at its own expense, shall promptly compute suchadjustment or readjustment and prepare and furnish to each Holder a certificatesetting forth such adjustment or readjustment and showing in detail the factsupon which such adjustment or readjustment is based.  The Company shall, upon the written request at any time of theHolder, furnish to such Holder a like certificate setting forth (i) suchadjustment or readjustment, (ii) the Conversion Price at the time in effect and(iii) the number of shares of common stock and the amount, if any, of othersecurities or property which at the time would be received upon conversion ofthe Note.

 

(h)                                 NoFive Percent Holders.  In no eventshall a Holder of this Note be entitled to receive shares of Common Stock uponconversion or in accordance with section 3(d) to the extent that the sumof (a) the number of shares of Common Stock beneficially owned by the Holderand its affiliates (exclusive of shares of Common Stock issuable uponconversion of the unconverted portion of the Note or the unexercised orunconverted portion of any other securities of the Company subject to a limitationon conversion or exercise analogous to the limitations contained herein) and(b) the number of shares of Common Stock issuable upon the conversion of theNote or payment or interest thereon, as applicable, with respect to which thedetermination of this subparagraph is being made, would result in beneficialownership by the Holder and its affiliates of more than 4.99% of theoutstanding shares of Common Stock.  Forpurposes of this subparagraph, beneficial ownership shall be determined inaccordance with Section 13(d) of the Securities Exchange Act of 1934, asamended, and Regulation 13 D-G thereunder, except as otherwise provided inclause (a) above.  Except as provided inthe

 

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immediately succeeding sentence,the restriction contained in this subparagraph (ii) shall not be altered,amended, deleted or changed in any manner whatsoever unless the Holders of amajority of the outstanding shares of Common Stock and the Holders of amajority of the principal amount and interest of the Notes outstanding shallapprove such alteration, amendment, deletion or change.  In applying the foregoing, such limitationshould be applied in conjunction with the application of limitations onconversion or exercise analogous to the foregoing limitation.

 

**4.****                                      NasdaqLimitation.**

 

(a)                                  ShareholderApproval.  If applicable, if on anydate (the “Determination Date”) (A) the number of shares of Common Stock issuedor issuable pursuant to this Note, the Other Notes issued pursuant to thePurchase Agreement, including the Conversion Shares and the Payment Shares, andpursuant to the Warrants (as defined in the Purchase Agreement) (the “IssuedShares of Common Stock”), would exceed 19.9% of the number of shares of CommonStock outstanding as of the date hereof (the “Issuable Maximum”), (B) theConversion Price, the value of the Payment Shares or the Exercise Price (asdefined in the Warrants), as applicable, in each case at the time in effect foreach of the Issued Shares of Common Stock was less than the greater of bookvalue or the fair market value of the Common Stock, valued at the closing bidprice, on the date hereof, and (C) the Company shall not have previouslyobtained the vote of the shareholders of the Company (the “Shareholder Approval”),if any, as may be required by the applicable rules and regulations of Nasdaq(or any successor entity) to approve the issuance of shares of Common Stock inexcess of the Issuable Maximum in a private placement whereby shares of CommonStock are deemed to have been issued at a price that is less than the greaterof book value or fair market value of the Common Stock, then with respect to(i) the aggregate principal amount of the Notes then held by the Holders forwhich a conversion at the Conversion Price at the time in effect, and (ii) theaggregate number of Warrant Shares (as defined in the Warrant) then held by theWarrantholder (as defined in the Warrant) which at the Exercise Price (asdefined in the Warrant) at the time in effect, collectively would result in anissuance of Common Stock in excess of the Issuable Maximum (the “ExcessPrincipal”), the Company may elect to prepay cash to the Holders in an amountequal to the then outstanding principal amount of this Note plus accrued andunpaid interest on such principal amount (the “Prepayment Amount”).  Any such election by the Company must bemade in writing to the Holders within five (5) days after such DeterminationDate and the payment of such Prepayment Amount applicable to such prepaymentmust be made in full to the Holders with ten (10) days after the date suchnotice is delivered.  If the Companydoes not deliver timely a notice of its election to prepay hereunder or shall,if it shall have delivered such a notice, fail to pay the Prepayment Amounthereunder within fifteen (15) days thereafter, then each Holder shall have theoption by written notice to the Company, to declare any such notice given tosuch Holder by the Company, if given, to be null and void and require theCompany to either: (Y) use its best efforts to obtain the Shareholder Approvalapplicable to such issuance as soon as is possible, but in any event not laterthan the 60th day after such request unless the Company has previously used itsbest efforts to, but has failed to, obtain such approval (provided, that if theCompany shall fail to obtain the Shareholder Approval during such 60-dayperiod, the Holder may demand the cash payment set forth in clause (Z) herein)or (Z) pay cash to such Holder, within ten (10) days of such Holder’s notice,in an amount equal to 100% of the Prepayment Amount (the “Demand PrepaymentAmount”) for such Holder’s ratable portion of the Excess Principal.  The Demand Prepayment Amount payable to theHolders pursuant to this section 4(a)

 

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shall be payable ratably inaccordance with the respective principal amounts of the Notes held by theHolders on the Determination Date which is convertible into shares of CommonStock in excess of the Issuable Maximum. If the Company fails to pay any Holder the Demand Prepayment Amount infull pursuant to this section 4(a) within ten (10) days after the datepayable, the Company will pay interest thereon at a rate of 20% per annum tosuch Holder, accruing interest daily from the date of conversion until suchamount, plus all such interest thereon, if any, is paid in full.  Until the Company has received theShareholder Approval, no Holder of the Notes shall be issued, upon conversionof Notes, shares of Common Stock in an amount greater than such Holder’sratable portion of the Issuable Maximum pursuant to section 4(b) below.

 

(b)                                 Allocationsof Issuable Maximum.  The IssuableMaximum shall be allocated pro rata among the Holder of this Note and theholders of the Other Notes based on the respective outstanding principalamounts of this Note and the Other Notes. Each increase in the Issuable Maximum shall be similarly allocated.

 

**5.****                                      Changeof Control.**  (a)       As soon as possible upon learning of a potential“Change of Control” (as defined below) the Company shall promptly make publicdisclosure of such potential change in control and simultaneously provide theHolder prompt written notice thereof, during which time the Holder may, bywritten notice to the Company, declare the principal of this Note immediatelydue and payable and, upon such a declaration, the maturity of this Note shallaccelerate and it shall become due and payable in an amount equal to at 130% ofthe then unpaid principal amount of the Note, plus all accrued and unpaidinterest thereon, through the payment date.

 

(b)                                 Definitionof Change of Control.  A “Change ofControl” shall be deemed to have occurred when (i) any person (as defined inSection 13(d)(3) or Section 14(d)(2) of the Exchange Act or anysuccessor provision to either of the foregoing), other than a person whocurrently owns 25% or more of the combined voting power of Common Stock,becomes the beneficial owner (as the term “beneficial owner” is defined underRule 13d-3 or any successor rule or regulation promulgated under theExchange Act) of a majority of the combined voting power of the Common Stock(ii) there shall have occurred under any indenture or other instrumentevidencing any indebtedness or preferred equity of the Company any “change ofcontrol” (or similar term as defined in such indenture or other evidence ofindebtedness or preferred equity) obligating the Company to repurchase, redeemor repay all or any part of the indebtedness or capital stock provided fortherein; or (iii) the Company merges with or into another person or entity andthe Corporation is not the surviving entity or sells or disposes of all orsubstantially all of its assets to any person or entity; (iv) the liquidation,dissolution, or the winding up of the affairs of the Company or (v) during anycalendar year, individuals who at the beginning of such period constituted theCompany’s board of directors (and any new members of such board of directorswhose election by the Company’s board of directors or whose nomination forelection by the Company’s stockholders was approved by a vote of a majority ofthe members of such board of directors then still in office who either weredirectors at the beginning of such period or whose election or nomination forelection was previously so approved), cease for any reason to constitute amajority of the Company’s board of directors.

 

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**6.****                                      Dischargeof Certain Provisions.**

 

(a)                                  If:(i)  at or prior to the Maturity Datethe Company shall have deposited with the Collateral Agent (as defined in theSecurity Agreement, the General Collateral Security Agreement and the Patentand Trademark Security Agreement), in trust, funds sufficient to pay atmaturity the aggregate principal amount of this Note and the Other Notes,together with all interest due thereon;

 

(ii)                                  noticeof such deposit shall have been given to the Holder and the holders of theOther Notes as to which such deposit is applicable, within ten (10) days afterthe date of such deposit; and

 

(iii)                               noevent listed in section 2(e) has occurred and is continuing; and

 

(iv)                              theCompany shall also pay or cause to be paid all other sums payable hereunder bythe Company, then on the date which is ninety-one (91) days after the date ofsuch deposit by the Company with the Collateral Agent, so long as during such90-day period no event listed in section 2(e) has occurred and iscontinuing (x) this Note shall cease to be of further effect and shall bedeemed satisfied and discharged (except as provided herein), (y) the Companyshall be entitled to release of Collateral as provided in the SecurityAgreement, the General Collateral Security Agreement and the Patent andTrademark Security Agreement, and (z) the Holder, on demand of the Companyaccompanied by an opinion of counsel and at the cost and expense of theCompany, shall execute proper instruments acknowledging the satisfaction anddischarge of this Note to the extent set forth herein.

 

(b)                                 Solong as this Note shall remain outstanding after it is deemed satisfied anddischarged pursuant to subsection (a) above, this Note shall continue ineffect following such satisfaction and discharge provided for above solely withrespect to rights of registration of transfer, exchange or replacement of thisNote, and rights to receive payment of the principal hereof and interest hereonin accordance with the terms of this Note from such deposited funds; provided,however, that, following such satisfaction and discharge, no claim for paymentof principal of or interest on this Note shall be made against theCompany.  For the avoidance of doubt,payment from such funds may also be made, in the case of interest due on thisNote, prior to such satisfaction and discharge.

 

(c)                                  Forthe avoidance of doubt, the Holder may exercise its right to receive ConversionShares pursuant to section 3 during the ninety-one (91) day periodreferred to in subsection (a) above. In the event that during the ninety-one (91) day period referred to insubsection (a) above the Holder exercises its right and receivesConversion Shares pursuant to section 3, the amount held by the CollateralAgent equal to the Conversion Price paid for the Conversion Shares receivedduring such ninety-one (91) day period shall be returned to the Company.

 

**7.****                                      Transferof Note.**  Upon due presentmentfor registration of transfer of this Note, the Company will execute, registerand deliver in exchange a new Note equal in aggregate principal amount to thethen unpaid principal amount of this Note, dated the date to which interest hasbeen paid and registered in the name of the transferee.  This Note shall not be transferable withoutthe written consent of the Company (which shall not be unreasonably

 

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withheld) and, in all eventsshall only be transferable only to a person who is an “accredited investor” asdefined in Regulation D promulgated under the Securities Act.

 

**8.****                                      GoverningLaw.**  This Note shall begoverned by and construed in accordance with the domestic substantive laws ofthe State of New York, without giving effect to any choice or conflict of lawprovision or rule that would cause the application of the laws of any otherjurisdiction.

 

**9.****                                      Jurisdiction.**  The Company irrevocably consents to thejurisdiction of the United States federal courts and the state courts locatedin the County of New York, State of New York in any suit or proceeding based onor arising under this Note and irrevocably agrees that all claims in respect ofsuch suit or proceeding may be determined in such courts.  The Company irrevocably waives the defenseof an inconvenient forum to the maintenance of such suit or proceeding.  The Company further agrees that service ofprocess upon the Company mailed by first class mail shall be deemed in everyrespect effective service of process upon the Company in any such suit orproceeding.  The Company agrees that afinal non-appealable judgment in any such suit or proceeding shall be conclusiveand may be enforced in other jurisdictions by suit on such judgment or in anyother lawful manner.  Nothing hereinshall affect the right of the Holder to institute suit and conduct an action inany other appropriate manner, jurisdiction or court or to serve process in anyother manner permitted by law.

 

**10.****                               Notices.**  All notices and other communications givento any party hereto pursuant to this Note shall be in writing and shall bedelivered, or mailed first class postage prepaid, registered or certified mail,addressed as follows:

 

(a)                                  Ifto the Company, to:

 

AlliancePharmaceutical Corp.6175 Lusk BoulevardSan Diego, California 92121Fax number: (858) 410-5306Attention: President

 

with a copyto:

 

Stroock &Stroock & Lavan LLP180 Maiden LaneNew York, NY 10038Fax number: (212) 806-6006Attention: Melvin Epstein, Esq.

 

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(b)                                 Ifto the Holder, to:

 

PhotogenTechnologies, Inc.140 Union Square DriveNew Hope, PA 18938Fax number: (215) 862-7130Attention: Taffy J. Williams, Ph.D., President

 

with a copyto:

 

Epstein Becker& Green, P.C.111 Huntington AvenueBoston, Massachusetts 12199Fax number: (617) 342-4001Attention: Susan E. Pravda, Esq.

 

Each such notice or othercommunication shall for all purposes be treated as being effective or havingbeen given when delivered, if delivered personally, by e-mail or facsimile withconfirmation of receipt or by overnight courier or, if sent by mail, at theearlier of its actual receipt or three (3) days after the same has beendeposited in a regularly maintained receptacle for the deposit of United Statesmail, addressed and postage prepaid as aforesaid.

 

**11.****                               Company’sWaivers.**  The Company, to theextent permitted by law, waives and agrees not to assert or take advantage ofany of the following: (a) any defense based upon an election of remedies by theHolder which may destroy or otherwise impair any subrogation or other rights ofthe Company or any guarantor or endorser of this Note; (b) any duty on the partof the Holder to disclose any facts or other data the Holder may now orhereafter know; (c) acceptance or notice of acceptance of this Note by theCompany; (d) presentment and/or demand for payment of this Note or anyindebtedness or obligations hereby promised; and (e) protest and notice ofdishonor with respect to this Note or any indebtedness or performance ofobligations arising hereunder.

 

**12.****                               Amendment;Waiver.**  All amendments orwaivers of any of the terms hereof (including, without limitation, any waiverof acceleration of the Maturity Date) and any payment of this Note with anyconsideration other than cash shall be made or effected only with the writtenconsent of the Holders of a majority of the principal amount and interest ofthe Notes outstanding.  No failure ordelay on the part of any Holder in the exercise of any power, right orprivilege hereunder shall operate as a waiver thereof, nor shall any single orpartial exercise of

 

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any such power, right orprivilege preclude other or further exercise thereof or of any other right,power or privilege.

 

**13.****                               Replacementof Note.**  Upon receipt ofevidence reasonably satisfactory to the Company of the loss, theft,destruction, or mutilation of this Note by the Holder, the Company shall issuea replacement instrument, at the Company’s expense, representing such Note inlieu of such lost, stolen, destroyed, or mutilated instrument, provided thatthe Holder agrees to indemnify the Company for any losses incurred by theCompany with respect to such lost instrument (other than the cost of issuingthe new instrument).

 

**14.****                               Headings.**  The headings of the sections of this Noteare inserted for convenience only and do not constitute a part of this Note.

 

**15.****                               Rank.**  The Notes shall rank senior to anyindebtedness outstanding as of the date hereof as to repayment.

 

**16.****                               ConsentRights.**  The Company shall not(i) declare or pay any dividends (whether in cash or stock) or otherwise makeany distributions with respect to Common Stock or (ii) create or sell anysecurities that rank senior to or paripassu with the Noteswithout the written consent of the Holders of a majority of the principalamount and interest of the Note and the Other Notes outstanding.

 

**17.****                               Assignability.**  This Note shall be binding upon the Companyand its successors and assigns and shall inure to the benefit of the Holder andits successors and assigns. Notwithstanding anything to the contrary contained in this Note or theTransaction Documents, this Note may be pledged and all rights of the Holderunder this Note may be assigned to any affiliate or to any other person orentity without the consent of the Company, subject to the Securities Act of1933.

 

**18.****                               Costof Collection.**  If default ismade in the payment of this Note, the Company shall pay the Holder hereof costsof collection, including reasonable attorneys’ fees.

 

**19.****                               RemediesCumulative.**  The remediesprovided in this Note shall be cumulative and in addition to all other remediesavailable under this Note, at law or in equity (including a decree of specificperformance and/or other injunctive relief), and nothing herein shall limit aHolder’s right to pursue actual damages for any failure by the Company tocomply with the terms of this Note.  TheCompany acknowledges that a breach by it of its obligations hereunder willcause irreparable harm to the Holder of the Note and that the remedy at law forany such breach may be inadequate.  TheCompany therefore agrees, in the event of any such breach or threatened breach,that the Holder of the Note shall be entitled, in addition to all otheravailable remedies, to an injunction restraining any breach, without thenecessity of showing economic loss and without any bond or other security beingrequired.

 

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IN WITNESSWHEREOF, the Company has caused this Note to be signed and to be dated the dayand year first above written.

 

 
|   | ALLIANCE  PHARMACEUTICAL CORP.                |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
|   | By:                                           |   |   |
|   | Name:  Theodore D. Roth                       |
|   | Title:  President and Chief Operating Officer |

 

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