Exhibit 10.12

 

FORBEARANCE AGREEMENT AND

FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

 

THIS FORBEARANCE AGREEMENT AND FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
(this “Agreement”), dated as of October 22, 2004, is by and among DrugMax, Inc.,
a Nevada corporation (“DrugMax” and, together with its Subsidiaries, Valley Drug
Company, an Ohio corporation, Valley Drug Company South, a Louisiana
corporation, and Discount Rx, Inc., a Louisiana corporation, individually each,
a “Borrower” and collectively, “Borrowers”), Jugal K. Taneja, an individual
residing in Florida (“Guarantor”), and Congress Financial Corporation (Florida),
a Florida corporation (“Lender”).

 

W I T N E S S E T H:

 

WHEREAS, Lender and each Borrower have entered into financing arrangements
pursuant to which Lender has made and may make loans and advances to Borrower as
set forth in the Loan and Security Agreement, dated effective April 15, 2003, by
and among Lender and Borrower, as amended by Amendment No. 1 to Loan and
Security Agreement, dated as of August 19, 2003 (“Amendment No. 1 to Loan
Agreement”), Amendment No. 2 to Loan and Security Agreement, dated as of March
31, 2004 (“Amendment No. 2 to Loan Agreement”), Amendment No. 3 to Loan and
Security Agreement, dated as of June 30, 2004 (“Amendment No. 3 to Loan
Agreement”) and Amendment No. 4 to Loan and Security Agreement, dated as of
August 5, 2004 (“Amendment No. 4 to Loan Agreement”), by and among Lender and
Borrower, and as amended by this Agreement (as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the “Loan Agreement”) and other agreements, documents and instruments,
including, without limitation, the Guarantee (as hereinafter defined) referred
to therein or at any time executed or delivered in connection therewith or
related thereto (all of the foregoing, together with the Loan Agreement, as the
same now exist or may hereafter be further amended, modified, supplemented,
extended, renewed, restated or replaced, being collectively referred to herein
as the “Financing Agreements”);

 

WHEREAS, Jugal K. Taneja has executed and delivered to Lender the Guarantee,
dated April 15, 2003 (the “Guarantee”), pursuant to which Guarantor absolutely
and unconditionally guaranteed to Lender the payment and performance of the
obligations, liabilities and indebtedness of Borrower arising from the Loan
Agreement subject to the limitations set forth in the Guarantee;

 

WHEREAS, Borrower and Guarantor acknowledge and agree that certain Events of
Default under the Loan Agreement and the Guarantee have occurred and are
continuing;

 

WHEREAS, Borrower and Guarantor have requested that Lender forbear from
exercising its rights as a result of such events of default, and Lender is
willing to agree to forbear from exercising its rights and remedies, subject to
the terms and conditions contained herein;

 

WHEREAS, each Borrower and Guarantor hereby request that Lender, notwithstanding
the Existing Defaults (as hereinafter defined), make available Revolving Loans
and Letter of

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Credit Accommodations, and Lender is willing to make available such Revolving
Loans and Letter of Credit Accommodations, from time to time during the
Forbearance Period (as hereinafter defined), in accordance with the terms of the
Loan Agreement, as amended by this Agreement;

 

WHEREAS, Lender has requested the cooperation and assistance of each Borrower
and Guarantor, and each Borrower and Guarantor has agreed to provide to Lender
the cooperation and assistance as may be necessary in order to perform the terms
and provisions contained herein; and

 

WHEREAS, Borrower has entered into a merger agreement, dated June 22, 2004, as
amended (the “Merger Agreement”), pursuant to which Familymeds Group, Inc.
(“FMG”) has agreed to merge with and into the Borrower (the “Merger”), a copy of
which has been made available to Lender, and Borrower shall seek Lender’s
consent to the Merger;

 

NOW, THEREFORE, in consideration of the foregoing, and the respective
agreements, warranties and covenants contained herein, the parties hereto agree,
covenant and warrant as follows:

 

SECTION 1. DEFINITIONS

 

1.1 Additional Definitions. As used herein, the following terms shall have the
respective meanings given to them below and the Loan Agreement shall be deemed
and is hereby amended to include, in addition and not in limitation, each of the
following definitions:

 

(a) “Bankruptcy Code” shall mean the United States Bankruptcy Code, being Title
11 of the United States Code as enacted in 1978, as the same has heretofore been
or may hereafter be amended, recodified, modified or supplemented, together with
all rules, regulations and interpretations thereunder or related thereto.

 

(b) “Consultant” shall mean Focus Management Group, retained by Borrower, and
any replacement or successor consultant or advisor, and its successors and
assigns, acceptable to Lender;

 

(c) “Consulting Agreement” shall mean the engagement letter agreement, dated
                    , 2004, between Borrower and the Consultant, as the same now
exists or may hereafter be further amended, modified, supplemented, extended,
renewed, restated or replaced, a copy of which is attached hereto as Exhibit A.

 

(d) “Existing Defaults” shall mean the Events of Default described on Schedule 1
hereto.

 

(e) “Forbearance Default” shall mean and shall immediately occur upon (i) the
occurrence of any Default or Event of Default (as defined in this Agreement or
the Loan Agreement) other than Existing Defaults (ii) the failure of any
Borrower or Guarantor to timely comply with any term, condition, covenant or
agreement set forth in this Agreement, (iii) any representation made by any
Borrower or Guarantor under or in connection with this

 

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Agreement shall prove to be materially false as of the date when made, (iv) the
filing of any petition (voluntary or involuntary) under the Bankruptcy Code or
the insolvency laws of any state by or against Borrower or Guarantor, or (v) in
the event that any person to whom any Borrower or Guarantor is indebted shall at
any time (A) exercise any of its rights or remedies against any Borrower or
Guarantor or its or their properties or assets, or (B) shall obtain a judgment
or lien against any Borrower or Guarantor or their assets or properties, or (C)
shall commence any legal proceeding against any Borrower or Guarantor, (D) or
shall take any other action to seek to collect indebtedness of any Borrower or
Guarantor payable to it or against any assets or properties of any Borrower or
Guarantor.

 

(f) “Forbearance Maturity Date” shall mean November 19, 2004.

 

(g) “Forbearance Period” shall mean the period beginning on the date this
Agreement becomes effective and ending on the Forbearance Maturity Date.

 

(h) “Forbearance Termination Date” shall have the meaning given to such term in
Section 3.2 hereof.

 

(i) “Forecast” shall mean the forecast (together with any amendments,
modifications and supplements thereto or any subsequent forecast), in form and
substance satisfactory to Lender, delivered to Lender pursuant to Section 5.2
hereof setting forth a thirteen (13) week cash flow and containing projected and
actual cash receipts, expenditures and loan availability of Borrower on a weekly
basis, for the periods covered thereby.

 

1.2 Amendments to Definitions.

 

(a) The definition of “Borrowing Base” as set forth in Section 1.7 of the Loan
Agreement is hereby amended by deleting such clause in its entirety and
substituting the following therefor:

 

“1.7 “Borrowing Base” shall mean at any time the amount equal to: (a)
eighty-five (85%) percent of the Eligible Accounts, plus (b) the lesser of: (i)
sixty-five (65%) percent of the Value of Eligible Inventory, consisting of
finished goods, which amount shall be reduced by one (1) percentage point on
October 22, 2004 and by an additional one (1) percentage point on Friday of each
week thereafter, or (ii) $16,000,000, subject to a $2,000,000 sublimit for
Controlled Substances, as such term is defined by the U.S. Food and Drug
Administration from time to time, less, (c) any Reserves. For purposes only of
applying the sublimit on Revolving Loans based on Eligible Inventory set forth
in clause (b) above, Lender may treat the then undrawn amounts of outstanding
Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory
as Revolving Loans to the extent Lender is in effect basing the issuance of the
Letter of Credit Accommodations on the Value of the Eligible Inventory being
purchased with such letter of Credit Accommodations. In determining the actual
amounts of such Letter of Credit Accommodations to be so treated for purposes of
the sublimit, the outstanding Revolving

 

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Loans and Reserves shall be attributed first to any components of the lending
formulas set forth above that are not subject to such sublimit, before being
attributed to the components of the lending formulas subject to such sublimit.”

 

1.3 Interpretation. All capitalized terms used herein which are not otherwise
defined herein shall have the meanings assigned thereto in the Loan Agreement
unless otherwise defined herein.

 

SECTION 2. ACKNOWLEDGMENT

 

2.1 Acknowledgment of Obligations. Each Borrower and Guarantor hereby
acknowledges, confirms and agrees that as of the close of business on October
22, 2004, Borrower is indebted to Lender: (a) in respect of the Revolving Loans
to Borrower in the aggregate principal amount of $12,966,948.73, (b) for Letter
of Credit Accommodations for the benefit of Borrower in the face amounts in the
aggregate principal amount of $-0-, and (c) for the Term Loan to Borrower in the
aggregate principal amount of $200,000.02. All of the Loans, together with
interest accrued and accruing thereon, and costs, expenses and other charges now
or hereafter payable by Borrower to Lender is, as of the date hereof,
unconditionally owing by Borrower to Lender, without offset, defense or
counterclaim of any kind, nature or description whatsoever. Borrower
acknowledges, confirms and agrees that the obligations, liabilities and
indebtedness of each of them to Lender for the payment and performance of the
Obligations pursuant to the Financing Agreements are unconditionally owing to
Lender without offset, defense or counterclaim of any kind, nature or
description whatsoever.

 

2.2 Acknowledgment of Security Interests. Each Borrower hereby acknowledges,
confirms and agrees that Lender has and shall continue to have valid,
enforceable and perfected liens upon and security interests in the assets and
properties of Borrower heretofore granted to Lender, pursuant to the Financing
Agreements or otherwise granted to or held by Lender.

 

2.3 Binding Effect of Documents. Each Borrower and Guarantor hereby
acknowledges, confirms and agrees that: (a) each of the Financing Agreements to
which it is a party has been duly executed and delivered to Lender by such
Borrower or Guarantor, as the case may be, and each is in full force and effect
as of the date hereof, (b) the agreements and obligations of such Borrower or
Guarantor contained in such documents, including, without limitation, Section
12.1(c) of the Loan Agreement, constitute the legal, valid and binding
obligations of such Borrower or Guarantor, as the case may be, enforceable
against it in accordance with their respective terms and such Borrower or
Guarantor, as of the date hereof, has no valid defense to the enforcement of
such obligations, and (c) Lender is and shall be entitled to the rights,
remedies and benefits provided for in the Financing Agreements.

 

SECTION 3. FORBEARANCE AS TO CERTAIN EVENTS OF DEFAULT

 

3.1 Acknowledgment of Defaults. Each Borrower and Guarantor hereby acknowledges
and agrees that the Existing Defaults have occurred and are continuing, each of
which constitutes an Event of Default and in the absence of this Agreement,
entitles Lender to cease making Loans and to exercise its other rights and
remedies under the Financing

 

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Agreements, applicable law or otherwise. Lender has not waived, presently does
not intend to waive and may never waive such Existing Defaults and neither
anything contained herein nor the transactions contemplated hereby shall be
deemed to constitute any such waiver. Each Borrower and Guarantor hereby
acknowledges and agrees that Lender has, absent this Agreement, the right to
declare the Obligations to be immediately due and payable under the terms of the
Financing Agreements.

 

3.2 Forbearance.

 

(a) In reliance upon the representations, warranties and covenants of each
Borrower and Guarantor contained in this Agreement, and subject to the rights
and remedies of Lender set forth in Sections 5 and 6 hereof and to all of the
other terms and conditions of this Agreement and any documents or instruments
executed in connection herewith, Lender agrees to forbear from exercising its
rights and remedies under the Financing Agreements, applicable law or otherwise,
to the effect that the rights and benefits otherwise available to Borrower under
the Loan Agreement in the absence of the Existing Defaults shall continue,
subject to the amendments and modifications contained herein, until the earliest
of the following dates (the earliest of such dates being referred to herein as
the “Forbearance Termination Date”):

 

(i) the Forbearance Maturity Date, and

 

(ii) the date of the occurrence of a Forbearance Default or any other Event of
Default, other than the Existing Defaults.

 

(b) Upon the Forbearance Termination Date, the agreement of Lender to forbear
shall automatically and without further action terminate and be of no force and
effect, it being understood and agreed that the effect of such termination will
be to permit Lender to immediately exercise its rights and remedies under the
Financing Agreements, applicable law or otherwise.

 

(c) Each Borrower and Guarantor agrees that all of the Obligations shall, if not
sooner paid, be absolutely and unconditionally due and payable in full in cash
by Borrower or Guarantor to Lender on the Forbearance Termination Date. In
addition, at any time on or after the Forbearance Termination Date, Lender may,
at its option, terminate any provision of the Loan Agreement relating to future
Revolving Loans or Letter of Credit Accommodations by Lender to Borrower. No
termination of the Loan Agreement or any provisions thereof or any of the other
Financing Agreements shall relieve or discharge such Borrower or Guarantor of
its respective duties, covenants and obligations under the Loan Agreement and
the other Financing Agreements until all Obligations have been indefeasibly paid
and satisfied in full in immediately available funds on terms and conditions
acceptable to Lender. Each Borrower and Guarantor hereby expressly waives any
right to receive notification under the UCC or otherwise of any disposition of
any Collateral by Lender or its designee, and waives any rights under UCC
Sections 9-611, 9-620(e) and 9-623.

 

3.3 No Other Waivers; Reservation of Rights.

 

(a) Lender has not waived, is not by this Agreement waiving and has no

 

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intention of waiving, any Defaults or Events of Default that have occurred or
which may be continuing on the date hereof or any Defaults or Events of Default,
which may occur after the date hereof (whether the same or similar to the
Existing Defaults or otherwise), and except as expressly set forth in Section
3.2 hereof, Lender has not agreed to forbear with respect to any of its rights
or remedies concerning any Defaults or Events of Default (other than the
Existing Defaults), which may have occurred or are continuing as of the date
hereof or which may occur after the date hereof.

 

(b) Subject to Section 3.2 hereof, Lender reserves the right, in Lender’s
discretion or to the extent provided in the Loan Agreement, to exercise any or
all of its rights and remedies under the Loan Agreement and the other Financing
Agreements as a result of any Defaults or Events of Default, which may be
continuing on the date hereof or any Defaults or Event of Default, which may
occur after the date hereof, and Lender has not waived any of such rights or
remedies, and nothing in this Agreement, and no failure, delay or course of
dealing on any of their part in exercising any such rights or remedies, shall be
construed as a waiver of any such rights or remedies. No single or partial
exercise of any right of the Lender shall preclude any later exercise of such
right, and failure by the Lender to require strict performance of any provision
of the Financing Agreements shall not affect any right of the Lender to demand
strict compliance and performance thereunder.

 

SECTION 4. RELEASE

 

4.1 Release.

 

(a) In consideration of the agreement of Lender contained herein and the making
of Revolving Loans and providing of Letter of Credit Accommodations by Lender to
Borrower pursuant to the Loan Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, each
Borrower and Guarantor, on behalf of itself and its successors, assigns, and
other legal representatives, hereby, jointly and severally, absolutely,
unconditionally and irrevocably releases, remises and forever discharges Lender,
and its present and former shareholders, affiliates, subsidiaries, divisions,
predecessors, directors, officers, attorneys, employees, and other
representatives and their respective successors and assigns (Lender and all such
other parties being hereinafter referred to collectively as the “Releasees” and
individually as a “Releasee”), of and from all demands, actions, causes of
action, suits, covenants, contracts, controversies, agreements, promises, sums
of money, accounts, bills, reckonings, damages and any and all other claims,
counterclaims, defenses, rights of set-off, demands and liabilities whatsoever
(individually, a “Claim” and collectively, “Claims”) of every name and nature,
known or unknown, suspected or unsuspected, both at law and in equity, which
each Borrower or Guarantor, or any of its successors, assigns, or other legal
representatives and their respective successors and assigns may now or hereafter
own, hold, have or claim to have against the Releasees or any of them for, upon,
or by reason of any nature, cause or thing whatsoever which arises at any time
on or prior to the day and date of this Agreement, including, without
limitation, for or on account of, or in relation to, or in any way in connection
with the Loan Agreement, as amended and supplemented through the date hereof,
the Guarantee and the other Financing Agreements.

 

(b) Each Borrower and Guarantor understands, acknowledges and agrees

 

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that the release set forth above may be pleaded as a full and complete defense
and may be used as a basis for an injunction against any action, suit or other
proceeding which may be instituted, prosecuted or attempted in breach of the
provisions of such release.

 

(c) Each Borrower and Guarantor agrees that no fact, event, circumstance,
evidence or transaction which could now be asserted or which may hereafter be
discovered shall affect in any manner the final and unconditional nature of the
release set forth above.

 

4.2 Covenant Not to Sue. Each Borrower and Guarantor, on behalf of itself and
its successors, assigns, and other legal representatives, hereby absolutely,
unconditionally and irrevocably, jointly and severally, covenants and agrees
with each Releasee that it will not sue (at law, in equity, in any regulatory
proceeding or otherwise) any Releasee on the basis of any Claim released,
remised and discharged by Borrower pursuant to Section 4.1 hereof.

 

SECTION 5. AMENDMENTS AND SUPPLEMENTS

 

5.1 Consultant. Borrower agrees to continue to retain the Consultant, pursuant
to and in accordance with the Consulting Agreement as in effect on the date
hereof. The Consulting Agreement shall not be amended, modified or supplemented
without the prior written consent of Lender. Borrower agrees to continue to
provide the Consultant with complete and full access to all of their books and
records and premises and agrees to cooperate fully with the Consultant. Borrower
hereby authorizes (which authorization and direction shall be irrevocable during
the term of the Consulting Agreement) and directs Consultant to share with
Lender all budgets, records, projections, financial information, reports and
other information relating to the Collateral, the financial condition or
operations of the businesses of Borrower and the raising of any additional
investments in Borrower, whether pursuant to sales of assets or equity.

 

5.2 Forecast.

 

(a) Borrower shall deliver the Forecast, in form and substance acceptable to
Lender, containing a thirteen (13) week statement of cash flow, including,
without limitation, cash receipts and cash disbursements, and weekly statements
of loan availability of Borrower (the “Projected Information”). The Forecast
shall be delivered to Lender as soon as possible but in no event later than the
date hereof and shall have been thoroughly reviewed by Borrower, its management
and the Consultant and shall set forth the Projected Information for the period
commencing October 15, 2004 through and including December 31, 2004. Thereafter,
Borrower shall furnish a supplemental thirteen (13) week “roll-forward” Forecast
on Wednesday of each week that sets forth (i) the Projected Information for the
additional week at the end of the period reflected in the Forecast and (ii) for
the period ending as of the close of business on Friday of the immediately
preceding week a comparison of the actual operating cash receipts and
disbursements to the Projected Information for such weekly period.

 

(b) Lender has relied upon the assumptions and information set forth in the
Forecast and upon the undertaking of each Borrower and Guarantor to deliver to
Lender supplemental Forecasts, in form and substance satisfactory to Lender,
including the Supplemental “roll-forward” Forecasts, in determining to enter
into the forbearance set forth herein.

 

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5.3 Replacement Financing. Borrower shall deliver to Lender, on or before
November 12, 2004, a written commitment in form and substance acceptable to
Lender, issued by one or more independent third-party lenders to provide
Borrower with replacement financing in an amount not less than the amount
necessary to pay in cash in full absolutely and unconditionally, all of the
Obligations due Lender by each Borrower and Guarantor (the “Commitment”).

 

5.4 Forbearance and Amendment Fee. In partial consideration of Lender’s
agreements set forth herein, Borrower shall pay a Forbearance and Amendment Fee
in the amount of $5,000, which fee is fully earned and payable on the date
hereof.

 

5.5 Amerisource Bergen Corporation (“ABC”) Demand Letter. Borrower shall deliver
to Lender on or before Tuesday November 9, 2004, a written withdrawal, in form
and substance acceptable to Lender, executed by counsel for ABC, of the written
notice, dated October 28, 2004, signed by counsel for ABC and delivered to
Lender and its counsel.

 

SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS

 

Each Borrower and Guarantor, jointly and severally represents, warrants and
covenants with and to Lender as follows, which representations, warranties and
covenants are continuing and shall survive the execution and delivery hereof:

 

6.1 Binding Effect of Documents. This Agreement and the other Financing
Agreements to which it is a party have been duly executed and delivered to
Lender by each Borrower and Guarantor are in full force and effect. The
agreements and obligations of each Borrower and Guarantor contained in such
documents constitute legal, valid and binding obligations of each such party
enforceable by Lender against each such party in accordance with their
respective terms except as such enforceability may be limited by an applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors’ rights generally and by general principles of equity regardless of
whether considered a proceeding in equity or at law.

 

6.2 No Conflict, Etc. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated herein, nor compliance with
the provisions hereof (a) has violated or will violate any law or regulation or
any order or decree of any court or Governmental Authority in any respect, or
(b) does or shall conflict with or result in the breach of, or constitute a
default in any respect under, any indenture, mortgage, deed of trust, security
agreement, agreement or instrument to which such Borrower or Guarantor is a
party or may be bound, or (c) has violated or will violate any provision of the
Certificate of Incorporation or By-Laws of each Borrower, or (d) has or will
result in, or require, the creation or imposition of any lien, charge, security
interest or other encumbrance on any of the assets or properties of Borrower or
Guarantor.

 

6.3 Sales or Other Disposition of Assets. Notwithstanding anything to the
contrary contained in Section 9.7(b) of the Loan Agreement or any other
provision in the Loan Agreement or any of the other Financing Agreements, each
Borrower shall not sell, transfer, lease, encumber or otherwise dispose of any
portion of the Collateral without the prior written consent of Lender, except
for sales of Inventory in the ordinary course of business.

 

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6.4 Loans, Investments. Notwithstanding anything to the contrary contained in
Section 9.10 of the Loan Agreement or any of the other Financing Agreements,
each Borrower and Guarantor shall not on and after the date hereof make any
loans or investments contemplated by Sections 9.10(e) or 9.10(f) of the Loan
Agreement.

 

6.5 Deposit Accounts. All of the deposit accounts, investment accounts or other
accounts in the name or used by each Borrower maintained at any bank or other
financial institution are set forth on the list thereof provided to Lender on or
about the date hereof. Such list also includes next to such deposit or other
accounts (a) the names and addresses of all persons authorized to sign checks on
behalf of Borrower or to otherwise withdraw funds from or to otherwise deal with
such deposit or other accounts of Borrower, and (b) the date such deposit
account or other account was opened and the amount of funds therein. In no event
shall Borrower open, establish or use any other deposit accounts, investment
accounts or other accounts after the date hereof, or permit any other such
accounts to be opened, established or used, without the prior written consent of
Lender. Each Borrower agrees to promptly notify the Lender upon obtaining
information or knowledge of any deposit account, investment account or other
account not previously identified to Lender.

 

6.6 Litigation. As of the date hereof, no court of competent jurisdiction has
issued any injunction, restraining order or other order against any Borrower or
Guarantor, and no governmental or other action or proceeding has been commenced
or threatened in writing (except as set forth on Schedule 1), seeking any
injunction, restraining order or other order against any Borrower or Guarantor.

 

6.7 No Default. After giving effect to the provisions of this Agreement, except
for the Existing Defaults, no Default or Event of Default exists or has occurred
as of the date of this Agreement.

 

6.8 Additional Events of Default. The parties hereto acknowledge, confirm and
agree that the failure of each Borrower or Guarantor to comply with the
covenants, conditions and agreements contained herein shall constitute an Event
of Default under this Agreement, the Loan Agreement and the other Financing
Agreements and shall not be subject to any cure or grace period pursuant to
Section 10.1(a)(ii) of the Loan Agreement or otherwise.

 

SECTION 7. CONDITIONS TO EFFECTIVENESS OF THIS AGREEMENT

 

The effectiveness of the forbearance and amendment made pursuant to this
Agreement shall be subject to the satisfaction of each of the following
conditions precedent:

 

Lender shall have received of each of the following, in form and substance
satisfactory to Lender:

 

(a) an original of this Agreement duly authorized, executed and delivered by
each Borrower and Guarantor;

 

(b) a certificate of the Secretary or an Assistant Secretary of each Borrower
with respect to the incumbency of such company’s officers, with an attached
true, correct and

 

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complete copy of presently effective resolutions of the board of directors or
each Borrower authorizing the execution, delivery and performance of this
Agreement and the documents to be executed or delivered in connection herewith;

 

(c) the list of deposit accounts, investment accounts and other accounts in the
name or used by any Borrower or Guarantor maintained at any bank or other
financial institution as provided for in Section 6.6 hereto;

 

(d) all representations and warranties set forth herein and in the Financing
Agreements are true and correct as if made on the date hereof.

 

SECTION 8. PROVISIONS OF GENERAL APPLICATION

 

8.1 Effect of this Agreement. Except as modified pursuant hereto, no other
changes or modifications to the Financing Agreements are intended or implied and
in all other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the effective date hereof. To
the extent of conflict between the terms of this Agreement and the other
Financing Agreements, the terms of this Agreement shall control.

 

8.2 Costs and Expenses. Without limiting the obligations of each Borrower or
Guarantor under Section 9.21 of the Loan Agreement, each Borrower and Guarantor,
absolutely and unconditionally agree to pay to Lender, on demand by Lender at
any time and as often as the occasion therefor may require, whether or not all
or any of the transactions contemplated by this Agreement are consummated: (a)
all fees and disbursements of any Persons retained by Lender or Lenders in
connection with the performance of, and compliance with, the terms and
conditions of this Agreement or any of the other Financing Agreements,
including, without limitation, the fees and disbursements of counsel to Lender
in connection with the preparation, negotiation, execution, or delivery of this
Agreement and any agreements delivered in connection with the transactions
contemplated hereby, and (b) expenses which shall at any time be incurred or
sustained by Lender or any Lender as a consequence of or in any way in
connection with the preparation, negotiation, execution, or delivery of this
Agreement and any agreements or documents prepared, negotiated, executed or
delivered in connection with the transactions contemplated hereby. In addition
to and not in limitation of any of Lender’s rights to make advances under the
Loan Agreement or the other Financing Agreements, each Borrower and Guarantor
absolutely and unconditionally acknowledge, confirm and agree that Lender may on
and after the date hereof make Special Lender Advances in order to pay any
amounts chargeable to any Borrower or Guarantor pursuant to the terms of this
Agreement or any of the other Financing Agreements consisting of costs, fees and
expenses.

 

8.3 Further Assurances. The parties hereto shall execute and deliver such
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Agreement.

 

8.4 Merger. This Agreement and the documents executed in connection herewith
represent the entire expression of the agreement of each Borrower, Guarantor and
Lender regarding the matters set forth herein. No modification, rescission,
waiver, release or amendment of any provision of this Agreement shall be made,
except by a written agreement signed by each Borrower, Guarantor and a duly
authorized officer of Lender.

 

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8.5 Governing Law. The validity, interpretation and enforcement of this
Agreement whether in contract, tort, equity or otherwise, shall be governed by
the internal laws of the State of New York but excluding any principles of
conflicts of law or other rule of law that would cause the application of the
law of any jurisdiction other than the laws of the State of New York. Without in
any limiting the foregoing, the parties elect to be governed by New York law in
accordance with, and relying on (at least in part), Section 5-1402 of the
General Obligations Law of the State of New York.

 

8.6 Binding Effect; No Third Party Beneficiaries. This Agreement shall be
binding upon and inure to the benefit of each of the parties hereto and their
respective successors and assigns. This Agreement is solely for the benefit of
each of the parties hereto and their respective successors and assigns, and no
other Person shall have any right, benefit, priority or interest under, or
because of the existence of, this Agreement.

 

8.7 Survival of Representations and Warranties. All representations and
warranties made in this Agreement or any other document furnished in connection
with this Agreement shall survive the execution and delivery of this Agreement
and the other documents, and no investigation by Lender or any Lender or any
closing shall affect the representations and warranties or the right of Lender
to rely upon them.

 

8.8 Severability. Any provision of this Agreement held by a court of competent
jurisdiction to be invalid or unenforceable shall not impair or invalidate the
remainder of this Agreement and the effect thereof shall be confirmed to the
provision so held to be invalid or unenforceable.

 

8.9 Reviewed by Attorneys. Each Borrower and Guarantor represents and warrants
that it (a) understands fully the terms of this Agreement and the consequences
of the execution and delivery of this Agreement, (b) has been afforded an
opportunity to have this Agreement reviewed by, and to discuss this Agreement
and document executed in connection herewith with, such attorneys and other
persons as each Borrower and Guarantor may wish, and (c) has entered into this
Agreement and executed and delivered all documents in connection herewith of its
own free will and accord and without threat, duress or other coercion of any
kind by any person. The parties hereto acknowledge and agree that neither this
Agreement nor the other documents executed pursuant hereto shall be construed
more favorably in favor of one than the other based upon which party drafted the
same, it being acknowledged that all parties hereto contributed substantially to
the negotiation and preparation of this Agreement and the other documents
executed pursuant hereto or in connection herewith.

 

8.10 Mutual Waiver of Right of Jury Trial. LENDER, EACH BORROWER AND GUARANTOR
EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (A) THIS AGREEMENT OR ANY OF
THE AGREEMENTS, INSTRUMENTS OR DOCUMENTS REFERRED TO HEREIN; OR (B) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN OR AMONG THEM; (C) ANY
CONDUCT, ACTS OR OMISSIONS OF LENDER, ANY BORROWER OR

 

11

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GUARANTOR OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, LENDERS, ATTORNEYS OR
ANY OTHER PERSONS AFFILIATED WITH THEM; IN EACH OF THE FOREGOING CASES, WHETHER
IN CONTRACT OR TORT OR OTHERWISE.

 

8.11 Counterparts. This Agreement may be executed in any number of counterparts,
but all of such counterparts shall together constitute but one and the same
agreement. In making proof of this Agreement, it shall not be necessary to
produce or account for more than one counterpart thereof signed by each of the
parties hereto. Delivery of an executed counterpart of this Agreement by
telefacsimile shall have the same force and effect as delivery of an original
executed counterpart of this Agreement. Any party delivering an executed
counterpart of this Agreement by telefacsimile also shall deliver an original
executed counterpart of this Agreement, but the failure to deliver an original
executed counterpart shall not affect the validity, enforceability, and binding
effect of this Agreement as to such party or any other party.

 

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12

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IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement
and Fifth Amendment to Loan and Security Agreement to be duly executed and
delivered by their authorized officers as of the day and year first above
written.

 

CONGRESS FINANCIAL CORPORATION

    (FLORIDA), as Lender

By:

 

/s/ Pat Cloninger

--------------------------------------------------------------------------------

Title:

 

Vice President

DRUG MAX, INC.

By:

 

/s/ William LaGamba

--------------------------------------------------------------------------------

Title:

 

COO

VALLEY DRUG COMPANY

By:

 

/s/ William LaGamba

--------------------------------------------------------------------------------

Title:

 

COO

VALLEY DRUG COMPANY SOUTH

By:

 

/s/ William LaGamba

--------------------------------------------------------------------------------

Title:

 

CEO

DISCOUNT RX, INC.

By:

 

/s/ William LaGamba

--------------------------------------------------------------------------------

Title:

 

COO

 

ACKNOWLEDGED AND AGREED:

/s/ Jugal K. Taneja

--------------------------------------------------------------------------------

Jugal K. Taneja

--------------------------------------------------------------------------------

SCHEDULE 1

TO

FORBEARANCE AGREEMENT

AND FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

 

Existing Defaults

 

1. Event of Default under Section 10.1(a)(ii) of the Loan Agreement arising from
a breach of Section 9.17 of the Loan Agreement.

 

2. Event of Default under Section 10.1(a)(ii) of the Loan Agreement arising from
a breach of Section 9.18 of the Loan Agreement.

 

3. Event of Default under the Loan Agreement arising from the following: In
approximately September 2004, AmerisourceBergen Corporation (“ABC”), one of the
Company’s largest suppliers, ceased supplying product on credit to the Borrower
and its subsidiaries. Since that date, the Borrower has purchased a limited
amount of supplies from ABC on COD terms. As of October 20, 2004, the Borrower
owed to ABC $6,625,938.57 and Valley Drug Company South (“Valley South”), one of
the Borrower’s subsidiaries, owed ABC an additional $4,095,403.04. On
approximately October 22, 2004, ABC filed a lien in Louisiana against Valley
South’s assets based upon an Application for Credit and Purchase Agreement dated
July 3, 2002 that ABC argues provides it with the right to file such a lien.
Borrower contest this assertion. Further, Borrower believes that any amounts due
to ABC directly by the Borrower and its subsidiaries (other than Valley South)
are unsecured. In a letter dated October 21, 2004, ABC demanded that, because
the Borrower is in default under the ABC agreement, the Borrower turn over all
collateral securing its obligations to ABC, including, but not limited to
inventory, equipment, deposit accounts, proceeds of general intangibles, and
threatened to take legal recourse against Valley South. The Borrower has not
authorized the turnover of such assets.