Unassociated Document


    SECURED
      PROMISSORY NOTE

     

    
      	
              $______________________

              New York

            	
                  
                       New York, 

                                                                                   
                June 23, 2006

            


    

         

     

    DRUGMAX,
      INC.,
      a
      Nevada corporation (“Borrower”),
      for
      value received, hereby unconditionally promises to pay to the order of
      _______________________., a Delaware limited partnership (“Lender”),
      the
      principal sum of __________________________, together with interest thereon,
      on
      the terms set forth below. 

     

    1. Payments.
      Borrower shall pay the principal sum hereof in quarterly installments of
      _________ each on the first day of each September, December, March and June,
      commencing September 1, 2006. The final installment of principal, together
      with
      all accrued and unpaid interest thereon, shall be due and payable on June 23,
      2011 (the “Maturity
      Date”),
      subject to earlier prepayment as set forth below.

     

    2. Interest.
      Interest shall accrue on the unpaid principal balance at a per annum rate equal
      to:

     

    2.5%
      during the period from the date of this Note through June 23, 2007 (the
“First
      Year”);

     

    5.0%
      during the period from June 23, 2007 through June 23, 2008 (the “Second
      Year”);
      

     

    10.0%
      during the period from June 23, 2008 through June 23, 2009; 

     

    15.0%
      during the period from June 23, 2009 through June 23, 2010; and

     

    17.5%
      during the period from June 23, 2010 through the Maturity Date.

     

    Interest
      shall be calculated on the basis of actual days elapsed and a 365-day year,
      and
      shall be due and payable on the first day of each September, December, March,
      and June, commencing September 1, 2006, and on the Maturity Date. 

     

    3. Payments
      Generally.
      All
      payments received hereunder shall be applied first to the payment of interest
      then accrued and unpaid, and the balance, if any, shall be applied on account
      of
      principal. Except as otherwise specifically provided in Section 4 of this Note,
      all payments made pursuant to this Note shall be made in lawful money of the
      United States of America and in immediately available funds to Lender at its
      office at 780 Third Avenue, 37th Floor, New York, New York 10017, or at such
      other address as the holder hereof shall have designated by written notice
      to
      Borrower. Whenever any payment to be made under this Note shall be stated to
      be
      due on a day which is not a Business Day, such payment may be made on the next
      succeeding Business Day, and such extension of time shall in such case be
      included in the computation of interest accrued. “Business
      Day”
means
      any day other than a Saturday or Sunday or other day on which commercial banks
      in the State of New York are authorized or required by law or executive order
      to
      close.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    4. Interest
      Payments in Stock.
      Notwithstanding anything to the contrary set forth above, in lieu of making
      any
      interest payments in cash during the First Year and/or Second Year, Borrower
      may, upon written notice given to Lender at least thirty (30) days prior to
      the
      date the relevant interest payment is due, issue and deliver to Lender on such
      interest payment date a number of registered and freely tradable shares of
      common stock, par value $0.001 per share, of
      Borrower (“Common
      Stock”)
      equal
      to the quotient of (a) the dollar amount of such interest payment then due,
      divided by (b) the Adjusted Share Price. “Adjusted
      Share Price”
means,
      with respect to the date in the First Year or Second Year on which such interest
      payment is due, an amount equal to ninety percent (90%) of the lesser of (x)
      the
      average of the daily market prices for the Common Stock for the 30 consecutive
      trading days immediately before such date and (y) the daily market price for
      the
      Common Stock for the date immediately preceding such date. The “daily market
      price” for each such trading day means (i) the closing bid price on such day on
      the principal stock exchange (including Nasdaq) on which such Common Stock
      is
      then listed or admitted to trading, or quoted, as applicable, (ii) if no sale
      takes place on such day on any such exchange, the last reported closing bid
      price on such day as officially quoted on any such exchange (including Nasdaq),
      (iii) if the Common Stock is not then listed or admitted to trading on any
      stock
      exchange, the last reported closing bid price on such day in the
      over-the-counter market, as furnished by the National Association of Securities
      Dealers Automatic Quotation System or the National Quotation Bureau, Inc.
      Notwithstanding the foregoing, in no event may Lender make any interest payment
      hereunder in shares of Common Stock after the occurrence of an Event of Default
      (as defined below) or if the daily market price for the Common Stock can not
      be
      determined as described above. 

     

    5. Prepayments.
      The
      principal balance and all accrued interest under this Note may be prepaid by
      Borrower, in whole or in part, without premium or penalty. In addition, upon
      the
      exercise by Lender of any Common Stock Purchase Warrant, dated the date hereof,
      issued by Borrower to Lender (each, a “Warrant”),
      Borrower shall, simultaneously with its receipt of any cash exercise price
      from
      Lender with respect to a Warrant, prepay the principal and interest amounts
      then
      remaining due hereunder in an amount equal to the lesser of (a) fifty percent
      (50%) of the cash proceeds paid by Lender to Borrower in connection with such
      exercise and (b) the aggregate principal and interest amounts then remaining
      due
      hereunder. 

     

    6. Security
      Agreement.
      This
      Note is one of the Notes referred to in, and is entitled to the benefits of,
      the
      Note and Warrant Purchase Agreement dated as of the date hereof among Deerfield
      Special Situations Fund, L.P., Deerfield Special Situations Fund International,
      Limited and Borrower (the “Purchase
      Agreement”).
      Payment (including accelerated payment as provided for below), of all amounts,
      whether of principal, interest or otherwise, payable under this Note is secured
      by the assets of Borrower in accordance with and pursuant to the provisions
      of
      the Security Agreement, dated as of the date hereof, entered into by Borrower
      in
      favor of Lender, as agent (the “Security
      Agreement”).

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

    7. Events
      of Default.
      The
      entire outstanding principal balance and all interest accrued thereon shall
      immediately become due and payable, without demand or notice, upon the
      occurrence of any of the following events (each, an “Event
      of Default”):

     

    (a) Borrower
      shall fail to pay any installment of principal owing hereunder or under any
      other Note issued under the Purchase Agreement when the same becomes due and
      payable; or Borrower shall fail to pay any installment of interest owing
      hereunder or under any Note issued under the Purchase Agreement when the same
      becomes due and payable and such failure shall continue for at least two
      Business Days; or 

     

    (b) Any
      representation or warranty made by Lender in the Purchase Agreement shall prove
      to have been incorrect in any material respect when made; or

     

    (c) Borrower
      shall fail to perform or observe any covenant or agreement contained in (i)
      Section 5.12 of the Purchase Agreement; or (ii) the Purchase Agreement (other
      than Section 5.12 thereof), the Security Agreement, any Warrant or the Investor
      Rights Agreement dated as of the date hereof among Borrower, Deerfield Special
      Situations Fund, L.P. and Deerfield Special Situations Fund International,
      Limited for a period of ten (10) calendar days after written notice of such
      failure has been given to Borrower; or

     

    (d) any
      event
      of default shall have occurred under the Security Agreement; or

     

    (e) Borrower
      shall (i) be adjudicated insolvent or bankrupt, or cease, be unable, or admit
      in
      writing its inability to pay its debts as they mature, (ii) make a general
      assignment for the benefit of, or enter into any composition or arrangement
      with, creditors, (iii) apply for, or consent (by admission of material
      allegations of a petition or otherwise) to the appointment of a receiver,
      trustee or liquidator of it or a substantial part of its assets, or authorize
      such application or consent, or a proceeding seeking such appointment shall
      be
      commenced against it without such application, consent or authorization and
      shall continue undismissed for a period of thirty (30) days, (iv) authorize
      or
      file a voluntary petition in bankruptcy or apply for, or consent (by admission
      of material allegations of a petition or otherwise) to, the application to
      it or
      a substantial part of its assets of a bankruptcy, reorganization, readjustment
      of debt, insolvency, dissolution, liquidation or other similar law of any
      jurisdiction, or authorize such application or consent, or proceedings for
      such
      application shall be instituted against it without such authorization, filing,
      or consent and shall be approved as properly instituted, continue undismissed
      for thirty (30) days or result in an adjudication of bankruptcy or insolvency,
      (v) suffer any judgment, writ of attachment or execution, sequestration or
      any
      similar process to be issued or levied against a substantial part of its assets
      which shall not be released, stayed or vacated within thirty (30) days after
      its
      issue or levy or (vi) take any action looking toward, or in furtherance of,
      any
      of the actions in (i) through (v) above; or

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

    (f) final
      judgment for the payment of money which, together with all other undischarged
      judgments against Borrower, shall exceed an aggregate of $500,000 at
      any
      time, shall be rendered against Borrower and such judgments shall remain
      undischarged for a period of thirty (30) days during which execution shall
      not
      be effectively stayed or deferred (whether by action of a court, by agreement
      or
      otherwise).

     

    8. Interest
      Rate Upon Event of Default.
      Upon
      the occurrence of any Event of Default, this Note shall bear interest, until
      paid in full, at an annual rate equal to the lesser of (a) the highest rate
      allowed by applicable law and (b) the interest rate then otherwise in effect
      hereunder plus 4% per annum. 

     

    9. Legal
      Proceedings.
      Should
      the indebtedness represented by this Note or any part hereof be collected in
      a
      legal proceeding, or this Note be placed in the hands of attorneys for
      collection after default, Borrower agrees to pay, in addition to the principal
      and interest due and payable hereon, all costs of collecting and attempting
      to
      collect this Note, including attorneys’ fees and expenses.

     

    10. Waiver
      of Notices etc.
      Presentment, protest, notice of nonpayment and protest and all other similar
      notices are hereby waived by Borrower. 

     

    11. Governing
      Law.
      This
      Note shall be interpreted and the rights and liabilities of the parties hereto
      determined in accordance with the laws of the State of New York without giving
      effect to its conflicts of law principles. 

     

    12. Amendment
      and Waiver; No Assignment by Borrower.
      No
      amendment, modification, or waiver of any provision of this Note nor consent
      to
      any departure by Borrower therefrom shall be effective unless the same shall
      be
      in writing and signed by Lender. No failure or delay on the part of Lender
      in
      exercising any right, power or remedy hereunder shall operate as a waiver
      thereof, nor shall any single or partial exercise of any such right, power
      or
      remedy preclude any other or further exercise thereof or the exercise of any
      other right, power or remedy. Any waiver granted hereunder by Lender must be
      in
      writing and shall be valid only in the specific instance in which given. The
      rights and remedies provided herein are cumulative, and are not exclusive of
      any
      other rights, powers, privileges, or remedies, now or hereafter existing, at
      law
      or in equity or otherwise. Neither this Note nor any of the rights, interests
      or
      obligations hereunder may be assigned or delegated, in whole or in part, by
      Borrower without the prior written consent of Lender. 

     

    13. Severability.
      If any
      provision of this Note, or the application of any provision to any person or
      circumstance, shall be held to be inconsistent with any present or future law,
      ruling, rule, or regulation of any court or governmental or regulatory authority
      having jurisdiction over the subject matter hereof, such provision shall be
      deemed to be rescinded or modified to the extent necessary to comply with such
      law, ruling, rule, or regulation, and the remainder of this Note, or the
      application of such provision to persons or circumstances other than those
      as to
      which it shall be held inconsistent, shall not be affected thereby.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    14. Binding
      Effect; Headings.
      The
      provisions of this Note shall be binding upon Borrower and its successors and
      permitted assigns, and shall inure to the benefit of Lender and its successors
      and assigns. The headings herein are for convenience only and shall not limit
      or
      define the meanings of the provisions of this Note. 

     

    15. Legend.
      THIS
      NOTE AND THE RIGHTS EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF THAT CERTAIN
      INTERCREDITOR AND SUBORDINATION AGREEMENT, DATED AS OF JUNE 23, 2006, AMONG
      FAMILYMEDS, INC., DRUGMAX, INC., VALLEY DRUG COMPANY AND VALLEY DRUG COMPANY
      SOUTH AS THE COMPANIES, DEERFIELD SPECIAL SITUATIONS FUND, L.P. AND DEERFIELD
      SPECIAL SITUATIONS FUND INTERNATIONAL, LIMITED AS THE SUBORDINATED CREDITORS
      AND
      WELLS FARGO RETAIL FINANCE, LLC, AS ABL AGENT. ANY TRANSFEREE BY ACCEPTANCE
      OF
      SUCH TRANSFER AGREES TO BE BOUND BY THE TERMS THEREOF

     

    IN
      WITNESS WHEREOF, Borrower has duly executed this Note as of the day and year
      first above written.

     

    
      	 	 	 
	 	DRUGMAX,
              INC.
	 
 	 
 	 
 
	 	By:  	/s/ 
	 	
              
Name:
	 	Title