Exhibit 10.2

 

The security represented hereby has not been registered under the Securities Act
of 1933, as amended (the “Act”). This security cannot be sold or otherwise
transferred unless this security is registered under the Act or the Company is
furnished with an acceptable opinion of counsel that an exemption from
registration is available.

 

This Subordinated Unsecured Convertible Debenture and the indebtedness evidenced
hereby are subordinated in the manner and to the extent set forth herein; and
each holder of this Subordinated Unsecured Convertible Debenture, by its
acceptance hereof, shall be bound by the subordination provisions hereof.

 

THIS INSTRUMENT OR CERTIFICATE AND THE RIGHT EVIDENCED HEREBY ARE SUBJECT TO THE
TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED MARCH 21, 2005 AMONG
FAMILYMEDS, INC., DRUGMAX, INC. VALLEY DRUG COMPANY SOUTH AND VALLEY DRUG
COMPANY AS THE COMPANIES, AMERISOURCEBERGEN DRUG CORPORATION AS SUBORDINATED
CREDITOR, AND GENERAL ELECTRIC CAPITAL CORPORATION AS AGENT, AND ANY FUTURE
SENIOR LENDERS, AS SENIOR LENDERS (THE “SUBORDINATION AGREEMENT”). ANY
TRANSFEREE BY ACCEPTANCE OF SUCH TRANSFER AGREES TO BE BOUND BY THE TERMS
THEREOF.

 

SUBORDINATED UNSECURED CONVERTIBLE DEBENTURE

 

$11,500,000   March 21, 2005    

 

DRUGMAX, INC., a Nevada corporation (the “Company”), the principal office of
which is located at 312 Farmington Avenue, Farmington, CT 06032, for value
received hereby promises to pay as set forth below to AmerisourceBergen Drug
Corporation (the “Holder”), with offices at 1300 Morris Drive, Chesterbrook, PA,
the sum of eleven million five hundred thousand dollars ($11,500,000.00),
together with interest at the rate set forth below, and any other charges which
may accrue pursuant to the terms of this Subordinated Unsecured Convertible
Debenture (this “Debenture”), or such other amount as shall then equal the
outstanding principal amount hereof and any unpaid accrued interest hereon and
other charges accrued.

 

The following is a statement of the rights of the Holder of this Debenture and
the conditions to which this Debenture is subject, and to which the Holder
hereof, by the acceptance of this Debenture, agrees:

 

1. Definitions. For the purposes hereof, in addition to the terms defined
elsewhere in this Debenture, the following terms shall have the following
meanings:

 

“Actual Amount Due” means (a) the number of shares of Common Stock to be issued
in payment of a Quarterly Principal Payment as determined by dividing $605,263
by the Issue Price or (b) the number of shares of Common Stock to be issued in
payment of a Quarterly Interest Payment by dividing the interest then due and
owing by the Issue Price.

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“Alternate Consideration” shall have the meaning set forth in Section 7.1.

 

“Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking
institutions in the Commonwealth of Pennsylvania are authorized or required by
law or other government action to close.

 

“Closing Date” means the date on which this Debenture is executed and delivered
by the Company and the original Holder.

 

“Common Stock” means the common stock, par value $.001 per share, of the Company
and securities into which such shares may hereafter have been reclassified.

 

“Conversion Date” shall have the meaning set forth in Section 4.2.

 

“Conversion Price” shall have the meaning set forth in Section 6.2.

 

“Conversion Shares” means the shares of Common Stock issuable (a) upon
conversion of the outstanding principal amount of this Debenture and accrued but
unpaid interest thereon in accordance with the terms hereof or (b) as payment of
the outstanding principal amount of this Debenture and interest thereon in
accordance with the terms hereof.

 

“Debenture Register” shall have the meaning set forth in Section 4.2.

 

“Deemed Interest Payment Shortfall” shall have the meaning set forth in Section
4.3.

 

“Deemed Payment Amount” shall have the meaning set forth in Section 4.3.

 

“Deemed Payment Amount Notice” shall have the meaning set forth in Section 4.3.

 

“Deemed Principal Payment Shortfall” shall have the meaning set forth in Section
4.3

 

“Effectiveness Period” shall have the meaning given to such term in the
Registration Rights Agreement.

 

“Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all conversions scheduled to occur or occurring by
virtue of one or more Notice of Conversions, if any, and made all payments of
principal and interest scheduled to occur or occurring by virtue of one or more
notices pursuant to Section 4.1, if any, (ii) all amounts owing in respect of
the Debenture shall have been paid; (iii) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the prospectus
thereunder to resell all of the shares issuable pursuant this Debenture (and the
Company believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iv) the Common Stock is trading on a
Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company believes,
in good faith, that trading of the Common Stock on a Trading Market will
continue uninterrupted for the foreseeable future), (v) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock for the issuance of all of the shares issuable pursuant to this Debenture,
(vi) there is then existing no Event of Default or event which, with the passage
of time or the giving of notice, would constitute an Event of Default, (vii) all
of the shares issued or issuable pursuant to the transaction proposed would not
violate the limitations set forth in Section 6.3 hereof, and (viii) the Holder
is not then in possession of what could be deemed material, non-public
information, in the reasonable determination of the Holder.

 

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“Event of Default” shall have the meaning set forth in Section 8.1.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Fundamental Transaction” shall have the meaning set forth in Section 7.1.

 

“Issue Price” means the ten (10) day VWAP at the Closing Date.

 

“Maturity Date” shall have the meaning set forth in Section 2.1.

 

“Net Proceeds” means the proceeds from the sale of Conversion Shares net of any
commissions and other reasonable costs of sale incurred by the Holder.

 

“Notice of Conversion” shall have the meaning set forth in Section 6.1.

 

“Original Issue Date” shall mean the date of the first issuance of this
Debenture regardless of the number of transfers of the Debenture and regardless
of the number of instruments which may be issued to evidence such Debenture.

 

“Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a
governmental agency.

 

“Quarterly Interest Payment” shall have the meaning set forth in Section 3.1.

 

“Quarterly Payment Date” shall have the meaning set forth in Section 2.1.

 

“Quarterly Principal Payment” shall have the meaning set forth in Section 2.1.

 

“Registration Rights Agreement” means that certain Registration Rights Agreement
of even date herewith to which the Company and the original Holder are parties,
as amended, modified or supplemented from time to time in accordance with its
terms.

 

“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement, covering among other things the
resale of the Conversion Shares and naming the Holder as a “selling stockholder”
thereunder.

 

“SEC” means the Securities and Exchange Commission.

 

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

 

“Security Agreement” means that certain Security Agreement of even date herewith
among the Holder, the Company, Valley Drug Company South and Familymeds, Inc.

 

“Senior Lenders” means General Electric Capital Corporation, acting as lender
and agent under that certain Amended Credit Agreement, dated as of December 9,
2004, among Familymeds, Inc., Valley Drug Company South, Valley Drug Company
(the “GECC Credit Agreement”) and any party providing financing to the Company
and/or its subsidiaries to repay or refinance the indebtedness under the GECC
Credit Agreement to the extent provided in the Subordination Agreement
referenced in the forepart and Section 10 of this Debenture.

 

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“Subordination Agreement” has the meaning given such term in the heading hereof.

 

“Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

 

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, or the Nasdaq National Market.

 

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg Financial L.P.
(based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(b) if the Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
listed or quoted on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by the National Quotation
Bureau Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in good
faith by the Holders and reasonably acceptable to the Company.

 

2. Principal.

 

2.1 Quarterly Principal Payments. Principal shall be due and payable in nineteen
(19) successive quarterly installments of $605,263 (each a “Quarterly Principal
Payment”) commencing on March 1, 2006 and on each March 1, June 1, September 1
and December 1 thereafter (each, a “Quarterly Payment Date”) and continuing
until September 1, 2010, (the “Maturity Date”), on which date all outstanding
amounts shall be paid.

 

2.2 Payment of Principal in Cash or Common Stock. Quarterly Principal Payments
shall be payable in cash or shares of Common Stock in an amount equal to
$605,263 divided by the Issue Price, or a combination thereof; provided,
however, payment in cash may occur only if approved in writing by GECC or any
successor Senior Lenders. Payment in cash shall be made by wire transfer of
immediately available funds to such accounts as may be specified by the Holder.
If the Company fails to obtain the approval of GECC or any successor Senior
Lenders, payment shall be in shares of Common Stock; provided, however, payment
in shares of Common Stock may only occur if during the 20 Trading Days
immediately prior to the applicable Quarterly Payment Date all of the Equity
Conditions have been met and the Company shall have given the Holder notice in
accordance with the notice requirements set forth in Section 4 hereof; provided
however, in the event the principal amount due on the final Quarterly Payment
Date exceeds $605,263 due to adjustments pursuant to Section 4.3 below, the
amount of such excess shall be paid by the Company in cash.

 

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2.3 Prepayment. This Debenture may be prepaid in full or in part at any time and
from time to time without premium or penalty. The amount prepaid shall be
calculated in accordance with Section 4.3 hereof.

 

3. Interest.

 

3.1 Interest Rate Calculated at Quarterly Payment Date. Interest on the
aggregate unconverted and then outstanding principal balance of this Debenture
shall be due and payable on each Quarterly Payment Date commencing on June 1,
2005 (each a “Quarterly Interest Payment”). This Debenture shall bear interest
at rate which shall adjust on each Quarterly Payment Date and which shall be
deemed to be:

 

(a) 10% if the Quarterly Interest Payment is made in shares of Common Stock; or

 

(b) the Prime Rate as published in the Wall Street Journal from time to time
(the “WSJ Prime Rate”) plus one percent (1.0%) per annum if the Quarterly
Interest Payment is made in cash; the interest rate under this Section 2(b)
shall adjust on each Quarterly Payment Date based upon the WSJ Prime Rate in
effect on each such Quarterly Payment Date; provided that in no event shall the
quarterly interest rate in effect hereunder be less than five percent (5.0%) per
annum or greater than ten percent (10%) per annum.

 

3.2 Interest Rate Calculated at Other Times. For purposes of any conversion of
this Debenture at the Holder’s option, the interest rate on the Conversion Date
shall be deemed to be 10%. For any other purpose, interest shall be deemed to
have accrued since the last Quarterly Payment Date at the interest rate
applicable to the last Quarterly Interest Payment.

 

3.3 Payment of Interest in Cash or Common Stock. Quarterly Interest Payments due
and payable on June 1, 2005, September 1, 2005 and December 1, 2005 shall be
payable in shares of Common Stock. Commencing March 1, 2006, Quarterly Interest
Payments shall be payable in cash or shares of Common Stock in an amount equal
to the interest then due and owing divided by the Issue Price, or a combination
thereof; provided, however, payment in cash may occur only if approved in
writing by GECC or any successor Senior Lender. Payment in cash shall be made by
wire transfer of immediately available funds to such accounts as may be
specified by the Holder. If the Company fails to obtain the approval of GECC or
any successor Senior Lender, payment shall be in shares of Common Stock;
provided, however, payment in shares of Common Stock may only occur if during
the 20 Trading Days immediately prior to the applicable Quarterly Payment Date
all of the Equity Conditions have been met and the Company shall have given the
Holder notice in accordance with the notice requirements set forth in Section 4
hereof. Interest shall cease to accrue with respect to any principal amount
converted provided that the Company in fact delivers the Conversion Shares
within the time period required by Section 6.4(b).

 

4. Payment of Principal and Interest in Common Stock.

 

4.1 Company’s Election to Pay Principal and Interest in Common Stock. Subject to
the terms and conditions herein and except as otherwise provided in Section 3.3
hereof, the decision whether to pay Quarterly Principal Payments and/or
Quarterly Interest Payments in shares of Common Stock or cash shall be at the
discretion of the Company. Not less than 20 Trading Days prior to each Quarterly
Payment Date, the Company shall provide the Holder with

 

5

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written notice of its election to pay principal and/or interest hereunder either
in cash or shares of Common Stock (the Company may indicate in such notice that
the election contained in such notice shall continue for later periods until
revised). Within 20 Trading Days prior to a Quarterly Payment Date, the
Company’s election (whether specific to a Quarterly Payment Date or continuous)
shall be irrevocable as to such Quarterly Payment Date. Subject to the
aforementioned conditions, failure to timely provide such written notice shall
be deemed to be an election by the Company to pay the Quarterly Principal
Payment and the Quarterly Interest Payment on such Quarterly Payment Date in
cash.

 

4.2 Mechanics of Payment in Common Stock. To the extent not inconsistent with
this Section 4, Section 6.4(b) shall govern the mechanics of payment of
principal and interest in common stock, and only for purposes of the payment of
principal and/or interest in shares, the Quarterly Payment Date shall be deemed
the Conversion Date. Principal and interest hereunder will be paid to the Person
in whose name this Debenture is registered on the records of the Company
regarding registration and transfers of Debentures (the “Debenture Register”).

 

4.3 Calculation of Deemed Payment Amount. Within 130 days after each Quarterly
Payment Date, the Holder shall provide written notice to the Company of the
Deemed Payment Amount (as defined herein) and the adjustment, if any, to the
amount of principal then outstanding (the “Deemed Payment Amount Notice”). The
“Deemed Payment Amount” shall be the Net Proceeds from sale of the Conversion
Shares issued to Holder in payment of the Quarterly Principal Payment and/or
Quarterly Interest Payment payable on such Quarterly Payment Date; provided,
however, if any portion of such Conversion Shares are not sold within three (3)
months after issuance to the Holder (the “Sale Period”), then the Deemed Payment
Amount with respect to any unsold Conversion Shares shall be the ten (10) day
VWAP for shares of Common Stock for the last ten (10) Trading Days of the
applicable Sale Period (net of the lesser of (i) five percent (5%) of such ten
(10) day VWAP or (ii) the average rate per share paid during the Sale Period by
the Holder in commissions and costs of sale with respect to the Conversion
Shares actually sold). Through December 31, 2005, the Holder may in no event
sell in any Trading Day Conversion Shares issued in payment of principal and/or
interest that, in the aggregate, exceed 25% of the average trading volume of
Common Stock for the preceding ten (10) Trading Days. In the event that the
Deemed Payment Amount for any Quarterly Payment Date is not equal the Actual
Amount Due on such Quarterly Payment Date, the Holder shall make an adjustment
to the amount of principal then outstanding in the manner set forth below. In
the event that the Actual Amount Due exceeds the Deemed Payment Amount on any
Quarterly Payment Date, the amount of principal deemed repaid by the Company on
such Quarterly Payment Date shall be limited to the Deemed Payment Amount less
the amount of interest then due and owing (such event shall hereinafter referred
to as a “Deemed Principal Payment Shortfall”), and no Event of Default shall
exist solely as a result of such Deemed Principal Payment Shortfall. In the
event that the Actual Amount Due exceeds the Deemed Payment Amount with respect
to the Quarterly Interest Payments due on June 1, 2005, September 1, 2005 and
December 1, 2005 (such event hereinafter referred to as a “Deemed Interest
Payment Shortfall”), the amount of principal then outstanding shall be increased
by such shortfall amount, and no Event of Default shall exist solely as a result
of such Deemed Interest Payment Shortfall. In the event that the Deemed Payment
Amount exceeds the Actual Amount Due on any Quarterly Payment Date, the amount
of principal deemed repaid on such Quarterly Payment Date shall be increased by
the amount of such excess. The Company shall deliver to the Holder any objection
to any calculation of the Deemed Payment Amount and the adjustment, if any, to
the amount of principal then outstanding within five (5) Business Days of
receipt of

 

6

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such calculation. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of demonstrable
error. If the calculation of the “Deemed Payment Amount” is required prior to
the Company’s receipt of the Deemed Payment Amount Notice, the Deemed Payment
Amount shall be calculated, subject to the above described adjustment following
receipt of the Deemed Payment Amount Notice, as (x) the number of Conversion
Shares issued to Holder in payment of the Quarterly Principal Payment and/or
Quarterly Interest Payment payable on a Quarterly Payment Date multiplied by (y)
the ten (10) day VWAP for shares of Common Stock as of such Quarterly Payment
Date.

 

5. Registration of Transfers and Exchanges.

 

5.1 Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.

 

5.2 Reliance on Debenture Register. Prior to due presentment to the Company for
transfer of this Debenture, the Company and any agent of the Company may treat
the Person in whose name this Debenture is duly registered on the Debenture
Register as the owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this Debenture is overdue,
and neither the Company nor any such agent shall be affected by notice to the
contrary.

 

6. Conversion.

 

6.1 Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible into
shares of Common Stock at the option of the Holder, in whole or in part at any
time and from time to time (subject to the limitations on conversion set forth
in Section 6.3 hereof). The Holder shall effect conversions by delivering to the
Company the form of Notice of Conversion attached hereto as Annex A (a “Notice
of Conversion”), specifying therein the outstanding principal amount of this
Debenture to be converted and, if applicable, any accrued but unpaid interest
thereon to be converted and the date on which such conversion is to be effected
(a “Conversion Date”). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is provided hereunder. To effect conversions hereunder, the Holder shall not be
required to physically surrender Debentures to the Company unless the entire
principal amount of this Debenture plus all accrued and unpaid interest thereon
has been so converted. Except as otherwise provided in Section 4.3, conversions
hereunder shall have the effect of lowering the outstanding principal amount of
this Debenture in an amount equal to the applicable conversion. The Holder and
the Company shall maintain records showing the principal amount converted and
the date of such conversions. The Company shall deliver any objection to any
Notice of Conversion within two (2) Business Days of receipt of such notice. In
the event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The Holder and
any assignee, by acceptance of this Debenture, acknowledge and agree that, by
reason of the provisions of this Section 6.1, following conversion of a portion
of this Debenture, the unpaid and unconverted principal amount of this Debenture
may be less than the amount stated on the face hereof.

 

6.2 Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to the Issue Price (the “Conversion Price”).

 

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6.3 Holder’s Restriction on Conversion. The Company shall not effect a voluntary
conversion of this Debenture pursuant to Section 6.1 above during any period,
not to exceed one hundred twenty (120) days, when the Company has publicly
announced that it is in a “quiet period” with respect to a secondary offering of
its securities. In addition, the Company shall not effect any payment of
principal or interest in shares of Common Stock, and the Holder shall not have
the right to convert any portion of this Debenture, pursuant to Section 6.1 or
otherwise, to the extent that after giving effect to such conversion, the Holder
(together with the Holder’s affiliates), as set forth on the applicable Notice
of Conversion, would beneficially own in excess of 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon conversion of this Debenture
with respect to which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would be issuable upon
(a) conversion of the remaining, unconverted portion of this Debenture
beneficially owned by the Holder or any of its affiliates and (b) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 6.3, beneficial ownership shall be calculated in accordance with Section
13(d) of the Exchange Act. To the extent that the limitation contained in this
Section 6.3 applies, the determination of whether this Debenture is convertible
(in relation to other securities owned by the Holder) and of which a portion of
this Debenture is convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction, the Holder will be deemed to represent
to the Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this Section 6.3 and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. For purposes of this Section 6.3, in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
Form 10-Q or Form 10-K, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company or the
Company’s Transfer Agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Debenture, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.

 

6.4 Mechanics of Conversion.

 

(a) Conversion Shares Issuable Upon Conversion of Principal and Accrued
Interest. The number of shares of Common Stock issuable upon a conversion
hereunder shall be determined by the quotient obtained by dividing (x) the
outstanding principal amount of this Debenture to be converted and, if
applicable, any accrued but unpaid interest thereon to be converted by (y) the
Conversion Price.

 

(b) Delivery of Certificate Upon Conversion. Not later than three (3) Trading
Days after any Conversion Date, the Company will deliver to the Holder a
certificate or certificates representing the Conversion Shares which shall be
free of restrictive legends and

 

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trading restrictions representing the number of shares of Common Stock being
acquired upon the conversion of this Debenture pursuant to Section 6.4(a)
hereof. The Company shall, if available and if allowed under applicable
securities laws, use its commercially reasonable efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section 6.4(b) electronically through the Depository Trust Corporation or
another established clearing corporation performing similar functions.

 

(c) Failure to Deliver Certificates. If in the case of any Notice of Conversion
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after a Conversion Date, the Holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the principal amount of Debentures tendered for conversion;
provided that if as a result of the limitations set forth in Section 6.3 hereof,
such failure by the Company is for a portion of the Conversion Shares for which
a Notice of Conversion has been delivered, the Holder shall be permitted to
rescind solely that portion not so converted.

 

(d) Obligation Absolute. The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Debenture in accordance with the terms
hereof are absolute and unconditional, irrespective of any action or inaction by
the Holder to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law by
the Holder or any other person, and irrespective of any other circumstance which
might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of such Conversion Shares; provided, however, such delivery
shall not operate as a waiver by the Company of any such action the Company may
have against the Holder. In the event a Holder of this Debenture shall elect to
convert any or all of the outstanding principal amount hereof and accrued but
unpaid interest thereon, the Company may not refuse conversion based on any
claim that the Holder or any one associated or affiliated with the Holder of has
been engaged in any violation of law, agreement or for any other reason, unless,
an injunction from a court, on notice, restraining and or enjoining conversion
of all or part of this Debenture shall have been sought and obtained and the
Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the principal amount of this Debenture then outstanding, which is subject to
the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder to the extent it obtains judgment. In the absence of an
injunction precluding the same, the Company shall issue Conversion Shares upon a
properly noticed conversion. Nothing herein shall limit a Holder’s right to
pursue actual damages or declare an Event of Default pursuant to Section 8
hereof for the Company’s failure to deliver Conversion Shares within the period
specified herein and such Holder shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit the Holders from seeking to enforce damages pursuant to any
other Section hereof or under applicable law.

 

(e) Damages for Failure to Timely Deliver Certificates Upon Conversion. The
Company acknowledges that the Holder may determine, in its sole discretion, to
sell Conversion Shares immediately upon conversion or payment thereof and,
therefore, delivery of

 

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such certificate or certificates pursuant to Section 6.4(b) by the third Trading
Date after the Conversion Date is of the essence. The Company further
acknowledges that in addition to any other rights available to the Holder, if
the Company fails for any reason, other than as a result of the limitations set
forth in Section 6.3 hereof, to deliver to the Holder such certificate or
certificates pursuant to Section 6.4(b) by the third Trading Day after the
Conversion Date, the Company shall be responsible for any damages incurred by
the Holder as a result of such failure.

 

(f) Reservation of Shares Issuable Upon Conversion. The Company covenants that
it will at all times reserve and keep available out of its authorized and
unissued shares of Common Stock solely for the purpose of issuance upon
conversion of the Debenture and payment of principal and interest on the
Debenture, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holder, not less
than such number of shares of the Common Stock as shall be issuable upon the
conversion of the outstanding principal amount of this Debenture and accrued but
unpaid interest thereon and payment of principal and interest hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
nonassessable and, if the Registration Statement is then effective under the
Securities Act, registered for public sale in accordance with such Registration
Statement.

 

(g) Fractional Shares. Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the VWAP at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.

 

(h) Transfer Taxes. The issuance of certificates for shares of the Common Stock
on conversion of the Debenture shall be made without charge to the Holder
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debenture so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

 

7. Fundamental Transaction, Notice to Holders and Subdivision or Combination of
Common Stock.

 

7.1 Fundamental Transaction. If, at any time while this Debenture is
outstanding, (a) the Company effects any merger or consolidation of the Company
with or into another Person, (b) the Company effects any sale of all, or
substantially all, of its assets in one or a series of related transactions, (c)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (d) the Company
effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such case, a
“Fundamental Transaction”), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for each Conversion Share
that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and

 

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amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately
prior to such Fundamental Transaction, the holder of one share of Common Stock
(the “Alternate Consideration”). For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to be received
in a Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Debenture
following such Fundamental Transaction. To the extent necessary to effectuate
the foregoing provisions, any successor to the Company or surviving entity in
such Fundamental Transaction shall issue to the Holder a new debenture
consistent with the foregoing provisions and evidencing the Holder’s right to
convert such debenture into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this Section 7.1 and ensuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

 

7.2 Notice to Allow Conversion by Holder. If (a) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (b) the Company shall
declare a special nonrecurring cash dividend on or a redemption of the Common
Stock; (c) the Company shall authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights; (d) the approval of any stockholders of the
Company shall be required in connection with any reclassification of the Common
Stock, any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (e) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture, and shall
cause to be mailed to the Holder at its last address as it shall appear upon the
stock books of the Company, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. The Holder is
entitled to convert this Debenture during the 20-day period commencing the date
of such notice to the effective date of the event triggering such notice.

 

7.3 Subdivision or Combination of Common Stock. If the Company at any time after
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
its outstanding

 

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shares of Common Stock into a greater number of shares, or combines (by
combination, reverse stock split or otherwise) one or its outstanding shares of
Common Stock into a smaller number of shares, appropriate inversely proportional
adjustments shall be made to the Issue Price, and appropriate adjustments shall
be made in making other determinations hereunder

 

8. Events of Default

 

8.1 Events of Default Defined. The Company shall be in default under this
Debenture upon the occurrence of any of the events specified in this Section 8.1
(any of the following being an “Event of Default”):

 

(a) Default in the payment of the principal and accrued but unpaid interest of
this Debenture when due and payable and failure to cure within fifteen (15)
business days of written notice; or

 

(b) The Common Stock shall not be eligible for quotation on or quoted for
trading on a Trading Market and shall not again be eligible for and quoted or
listed for trading thereon within five (5) Trading Days; or

 

(c) A Registration Statement shall not have been declared effective by the SEC
on or before the 180th calendar day after the Closing Date; or

 

(d) If, during the Effectiveness Period (as defined in the Registration Rights
Agreement), the effectiveness of the Registration Statement lapses for any
reason or the Holder shall not be permitted to resell Registrable Securities (as
defined in the Registration Rights Agreement) under the Registration Statement,
in either case, for more than 30 consecutive Trading Days or 60 non-consecutive
Trading Days during any 12 month period; provided, however, that in the event
that the Company is negotiating a merger, consolidation, acquisition or sale of
all or substantially all of its assets or a similar transaction and in the
written opinion of counsel to the Company, the Registration Statement, would be
required to be amended to include information concerning such transactions or
the parties thereto that is not available or may not be publicly disclosed at
the time, the Company shall be permitted an additional ten (10) consecutive
Trading Days during any 12 month period relating to such an event; or

 

(e) An Event (as defined in the Registration Rights Agreement) shall not have
been cured to the satisfaction of the Holder prior to the expiration of thirty
days from the Event Date (as defined in the Registration Rights Agreement)
relating thereto (other than an Event resulting from a failure of an
Registration Statement to be declared effective by the SEC on or prior to the
Effectiveness Date (as defined in the Registration Rights Agreement), which
shall be covered by Section 8(d); or

 

(f) The Company shall fail for any reason, other than as a result of the
limitations set forth in Section 6.3 hereof, to deliver certificates to the
Holder prior to the fifth (5th) Trading Day after a Conversion Date pursuant to
and in accordance with Section 6.4 or the Company shall provide notice to the
Holder, including by way of public announcement, at any time, of its intention
not to comply with requests for conversions of this Debenture in accordance with
the terms hereof; or

 

(g) If the Company shall materially fail to perform any material term, covenant
or agreement of this Debenture, or

 

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(h) Business failure or admission of inability to pay debts as they become due
of, or an assignment for the benefit of creditors by or the filing of a petition
under bankruptcy, insolvency or debtor’s relief law, commenced against the
Company or any of its subsidiaries (each, a “Bankruptcy Event”) which is not
discharged within sixty (60) business days.

 

8.2 Remedies Upon Event of Default. Subject to the provisions of Section 10
below and any Subordination Agreement, upon the occurrence of an Event of
Default:

 

(a) The entire principal amount of this Debenture and all interest thereon and
all other amounts accrued hereunder shall at the option of the Holder be
automatically accelerated and be immediately due and payable whether in cash or
by check, or, solely at the Holder’s option, in shares of Common Stock; or

 

(b) To the extent set forth in the Security Agreement, the Holder shall have the
right to exercise the remedies as “secured party” under the Security Agreement;
or

 

(c) The Holder shall have all of the rights and remedies provided to the Holder,
at law and in equity, by statute or otherwise, and no remedy herein conferred
upon the Holder is intended to be exclusive of any other remedy and each remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in, equity, by statute or
otherwise

 

Upon the occurrence and during the continuance of an Event of Default, interest
on the outstanding principal amount of this Debenture shall accrue and be
payable at the lesser of twelve percent (12%) per annum or the highest amount
permitted by law.

 

8.3 Registration Defaults. Upon the occurrence of and during the continuance of
any of the events specified in Section 8.3(a) or (b) hereof, interest on the
outstanding principal amount of this Debenture shall accrue and be payable at
the lesser of eighteen (18%) or the highest amount permitted by law:

 

(a) A Registration Statement shall not have been filed with the SEC on or before
the 45th calendar day after the Closing Date; or

 

(b) A Registration Statement shall not have been declared effective by the SEC
on or before the 90th calendar day after the Closing Date or, if the SEC
conducts a full or limited review of such Registration Statement, on or before
the 120th calendar day after the Closing Date.

 

9. Debenture Holder Not Shareholder. This Debenture does not confer upon the
Holder hereof, as such, any right whatsoever as a shareholder of the Company.

 

10. Subordination. The payment of the principal of and interest on this
Debenture is subordinated, to the extent and in the manner provided in that
certain Subordination Agreement of even date herewith among the Company,
Familymeds, Inc., Valley Drug Company South, Valley Drug Company, as the
Companies, the Holder as Subordinated Creditor and GECC, as agent, or any future
Senior Lender (as defined therein) as Senior Lenders. Notwithstanding any other
provision of this Debenture to the contrary, all rights and remedies of the
Holder hereunder are subject to the terms and conditions of the Subordination
Agreement.

 

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11. Guaranty of Debenture. Concurrently herewith, Valley Drug Company South and
Familymeds, Inc. each shall execute a continuing guaranty agreement relating to
this Debenture, in the form attached hereto as Annex B.

 

12. Waiver and Amendment. Any amendment, waiver or modification of any provision
of this Debenture must be executed, in writing by the party against which it is
to be enforced.

 

13. Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Debenture as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this Debenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.

 

14. Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.

 

15. Assignment. Subject to the restrictions on transfer described in Section 16
below, the rights and obligations of the Company and the Holder of this
Debenture shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.

 

16. Transfer of this Debenture. The Holder may not assign, exchange, encumber,
pledge, transfer, or otherwise dispose of this Debenture without the prior
written consent of the Company and without such assignee having executed an
acknowledgment of the Subordination Agreement in form and substance satisfactory
to the Senior Lender. The Company will not unreasonably withhold or delay
consent to the assignment or transfer of this Debenture to any other direct or
indirect subsidiary of AmerisourceBergen Corporation, or its successor.

 

17. Release. The Company hereby waives and releases:

 

(a) all procedural errors, defects and imperfections in any proceeding
instituted by Holder under this Debenture or any related documentation;

 

(b) unless specifically required herein, all defects in any notices of the
Company’s default or of Holder’s election to exercise, or Holder’s actual
exercise of, any option under this Debenture or any related documentation.

 

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18. Waiver. Any waiver by the Company or the Holder of a breach of any provision
of this Debenture shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.

 

19. Notices. Any notice, request or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if telegraphed or mailed by registered or certified
mail, postage prepaid, at the respective addresses of the parties as set forth
herein. Any party hereto may by notice so given change its address for future
notice hereunder. Notice shall conclusively be deemed to have been given when
personally delivered or when deposited in the mail or telegraphed in the manner
set forth above and shall be deemed to have been received when delivered.

 

20. Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed Debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.

 

21. Governing Law. This Debenture shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, excluding that
body of law relating to conflict of laws.

 

22. Heading; References. All headings used herein are used for convenience only
and shall not be used to construe or interpret this Debenture. Except where
otherwise indicated, all references herein to Sections refer to Sections hereof.

 

23. Costs of Enforcement. The Company agrees to pay as incurred all costs and
expenses, including reasonable attorneys’ fees, incurred by the Holder in
connection with the enforcement of this Debenture or the protection or
preservation of any rights of the Holder hereunder, including enforcement in any
voluntary or involuntary bankruptcy proceeding filed by or against the Company
or any guarantor hereof.

 

24. Stock Direct Program. In order to facilitate the Holder’s ability to
successfully sell Conversion Shares, the Holder agrees to consider in good faith
selling shares through any stock direct sales program the Company may implement,
or any stock broker the Company may suggest, from time to time.

 

[THE NEXT PAGE IS THE SIGNATURE PAGE]

 

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IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 21st
day of March, 2005.

 

DRUGMAX, INC.    Witness: By:  

 

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Printed Name:   Edgardo A. Mercadante    Printed Name:  

 

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Title:   President and CEO    Title:  

 

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Corporate Seal