SECURED PROMISSORY NOTE
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 000 Xxxxx Xxxxxx, 00xx Xxxxx, Xxx Xxxx, Xxx Xxxx 00000, 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 Xxxxxx, 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 Xxxxxxxx, 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, Xxxxxxxx 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 Xxxxxxxx.
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 Xxxxxxxx.
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 Xxxxxx. 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 Xxxxxx 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 Xxxxxx.
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
XXXXX 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, Xxxxxxxx has duly executed this Note as of the day and year
first above written.
| DRUGMAX, INC. | ||
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