CONFIDENTIAL TREATMENT REQUESTED
(The redacted material, indicated by [*], has been separately filed with the
Commission)
AMENDMENT TO SUPPLY AGREEMENT
This Amendment to the Supply Agreement ("Amendment") is entered into this 5th
day of November, 1999 by and between Phar-Mor, Inc. LLC and its affiliates
("Phar-Mor") and McKesson Drug Company, a division of McKesson HBOC, Inc.
("McKesson"), formerly McKesson Corporation.
INTRODUCTION
Pursuant to the terms of the Supply Agreement dated June 19, 1997 (the "Supply
Agreement"), McKesson and Phar-Mor, Inc. entered into an agreement to establish
a prime vendor relationship whereby McKesson serves as the supply source of
pharmaceutical and OTC products for Phar-Mor and its retail pharmacies.
Phar-Mor, Inc. has recently purchased all of the assets of Pharmhouse (the
"Transaction"). In view of the Transaction, Phar-Mor and McKesson now desire to
amend the Supply Agreement as set forth below.
AGREEMENT
For good and valuable consideration, McKesson and Phar-Mor hereby agree as
follows:
1. McKesson hereby acknowledges the assignment of all of the tangible
assets, rights and obligations of Phar-Mor, Inc. including the Supply
Agreement, to its affiliate, Phar-Mor, Inc. LLC on June 27, 1997.
Phar-Mor, Inc. LLC remains a wholly-owned affiliate of Phar-Mor, Inc.
and its wholly-owned subsidiary, Phar-Mor of Wisconsin, Inc. Inasmuch
as the retail pharmacies subject to this Agreement are operated by
wholly-owned subsidiaries and affiliates of Phar-Mor, Inc., the parties
agree that the appropriate parties to the Supply Agreement, as amended,
should be Phar-Mor, Inc. LLC and its affiliates, and McKesson hereby
agrees to such assignment of the Supply Agreement. Accordingly,
hereinafter all references to Phar-Mor shall refer to Phar-Mor, Inc.
LLC and its affiliates.
2. Section 8 of the Supply Agreement shall be amended to reflect an annual
purchase commitment of [ * ] (net of returns, allowances and rebates)
in volume of D.S.D. Merchandise by Phar-Mor.
3. The term of the Supply Agreement as defined in Section 11 thereof shall
be modified by this Amendment to extend for an additional four-year
period through November 15, 2005. For purposes hereof, each Contract
Year during the term of the Supply Agreement shall be defined as the
twelve (12) month period commencing on November 15.
4. Section 9 of the Agreement shall be modified by adding the following
payment terms:
McKesson agrees to provide Phar-Mor with [ * ] [(*)] day payment terms.
All invoices for each week (Sunday through Saturday) will be due and
payable via wire transfer on the [ * ] day following the end of each
week. If any of the due dates herein fall on a weekend or holiday,
payment will be due the next business day. All late charges as noted in
Section 9 of the Supply Agreement will apply to unpaid balances. The
availability of such payment terms and conditions as specified in this
Section 4 of the Amendment is based on and contingent upon payment by
Phar-Mor via wire transfer. Until such time as Phar-Mor begins payment
by wire transfer, the existing payment terms in the Supply Agreement
shall apply.
5. The first paragraph of Section 7 Purchase Price: Definition of Cost
will be deleted in its entirety and replaced with the following:
The purchase price of the Merchandise delivered to Phar-Mor shall be
the Cost of the Merchandise less the reductions or plus the markup, as
applicable, set forth in the cost of goods schedule set forth in
Section 19 below. Except in the case of contract items as discussed
below, "Cost" means the manufacturer's published acquisition cost
(exclusive of cash discounts) on the date of McKesson's invoice to
Phar-Mor, adjusted for selected bonus goods, manufacturers' off-invoice
allowances and manufacturers' deal prices to be made available to
Phar-Mor in accordance with McKesson's established policies. For
purchases of Merchandise with respect to which Customer has entered
into a vendor contract with a manufacturer ("Contract Products") loaded
with McKesson, "Cost" shall mean the "bid price" of the product as set
forth in the vendor contract.
6. The Developmental Funds subsection in Section 8 of the Supply Agreement
-------------------
will be deleted in its entirety and replaced with the following:
In consideration for the initial two years of the four-year term
extension as specified in Section 3 of this Amendment, McKesson agrees
to pay to Phar-Mor the following amounts:
(i) the sum of [ * ] ("Developmental Funds") within ten (10) days
of the Select Implementation Date as herein defined. For
purposes hereof, the Select Implementation Date shall mean the
date on which all Phar-Mor and Pharmhouse locations are fully
participating in the McKesson Select Generics
auto-substitution program; and
(ii) the sum of [ * ] ("Continuing Commitment Funds") on November
15, 2001.
In the event that the Supply Agreement is terminated by either party
for any reason during the term hereof (other than a material breach of
the Supply Agreement by McKesson that is not cured by McKesson within
sixty (60) days of Phar-Mor's notice thereof, upon termination for
which Phar-Mor shall not be required to repay such amounts already
paid), Phar-Mor shall immediately reimburse to McKesson the then
applicable portion of the above-specified Developmental Funds and
Continuing Commitment Funds as determined by the following pro-rata
reimbursement formulas:
Reimbursement Formula for Previously Paid Developmental Funds
-------------------------------------------------------------
|----- -----|
| |
| Number of months remaining in the Supply |
| Agreement between the date of termination |
| [ * ] times and November 15, 2003 |
| ---------------------------------------- |
| 60 |
| |
| |
|----- -----|
Reimbursement Formula for Previously Paid Continuing Commitment Funds
|----- -----|
| |
| Number of months remaining in the Supply |
| Agreement between the date of termination |
| [ * ] times and November 15, 2003 |
| ----------------------------------------- |
| 24 |
| |
|----- -----|
7. Section 19 Cost of Goods, will be deleted in its entirety and replaced
-------------
with the following:
The Retail Cost of Goods set forth in this Section 19 is based on
Phar-Mor achieving the following purchase volumes in Direct Store
Delivery ("D.S.D.") prescription drug and OTC product purchases (net of
returns, allowances and rebates) from McKesson throughout the term of
this Agreement:
(i) $[ * ] in total chainwide annual purchases; and
(ii) minimum chainwide average of $[ * ] per store per month.
Retail Direct Store Delivery
----------------------------
RX Cost Minus [ * ]%
OTC Cost Minus [ * ]%
Pharmhouse Transition OTC Cost of Goods
Subject to the terms and conditions herein, all former Pharmhouse locations will
be billed at Cost Minus [ * ]% on OTC products as per this Section 19 of the
Supply Agreement. This cost will remain effective as long as such OTC purchases
remain consistent with Phar-Mor's current practices and do not include
Non-Ethical OTC and General Sundries which are to be provided to the Phar-Mor
and Pharmhouse stores by the Phar-Mor warehouse.
Phar-Mor stores will be invoiced at Cost Plus [ * ]%. Provided that Phar-Mor is
maintaining a minimum chainwide monthly average net volume of [ * ] in D.S.D.
purchases per store, McKesson will provide a monthly rebate to Phar-Mor's
corporate offices in the amount of [ * ]% on discountable Rx purchases and [ *
]% of discountable OTC purchases (net of returns and allowances). In the event
that Phar-Mor's chainwide monthly average net purchase volume per store is less
than $[ * ], the monthly rebate will be the difference between the invoice price
and the applicable cost of goods. Items that are billed at a net price as
outlined in Section 7 of the Supply Agreement will be excluded from the monthly
rebate.
In the event that Phar-Mor fails to maintain a minimum chainwide average volume
of $[ * ] in net D.S.D. prescription drug and OTC product purchases per store
per month from McKesson during any three (3) consecutive months of this
Agreement, all retail cost of goods pricing hereunder shall be increased to the
then applicable pricing based on the following schedule until such time as the
minimum chainwide D.S.D. prescription drug and OTC product net purchase volume
requirement of $[ * ] is met for three (3) consecutive months, at which time the
retail cost of goods pricing shall return to Cost minus [ * ]% for Rx and Cost
minus [ * ]% for OTC products.
Chainwide Monthly
Average Per Store Rx OTC
(net of returns, -- ---
allowances and rebates)
-----------------------
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
It is further understood and agreed by both parties that if Phar-Mor
fails to maintain a minimum chainwide average volume of [ * ] in net
D.S.D. prescription drug and OTC product purchases per store per month
from McKesson during any rolling three (3) month period of this
Agreement, such failure shall constitute a default of this Agreement by
Phar-Mor.
8. The Annual Volume Incentive subsection as set forth in Section 19 of
-------------------------
the Supply Agreement will be deleted in its entirety; provided however
that within thirty (30) days of the execution of this Amendment by both
parties, McKesson will pay to Phar-Mor a volume incentive payment based
on Phar-Mor's purchase volume of D.S.D. prescription drug and OTC
products (net of returns, allowances and rebates) for the period
between November 1, 1998 and July 1, 1999 in the amount of [ * ]% of
net total purchases during such period.
9. Section 20 Generic Pharmaceuticals will be deleted in its entirety and
------------------------
replaced with the following:
Phar-Mor agrees to participate in McKesson's Select Generics Program
through its auto-substitution feature and to thereby designate this
program as the primary source of generic pharmaceuticals for all
Phar-Mor and Pharmhouse stores. The Select Implementation Date for all
such stores will occur on or before-January 31, 2000. All
Phar-Mor/Pharmhouse pharmacies will be billed for McKesson Select
Generics at discounted bid prices, which are subject to change due to
market conditions. In addition, a quarterly rebate will be paid
Phar-Mor following the Select Implementation Date in accordance with
the following schedule:
Chainwide Quarterly McKesson Select Generics Rebate Percent
Purchases (net on Net McKesson
of returns allowances and rebates) Select Generics Purchases
---------------------------------- -------------------------
Less than [ * ] [ * ]%
and above [ * ]%
[ * ]%
All Phar-Mor/Pharmhouse locations must be fully participating in the McKesson
Select Generic auto-substitution program in order for Phar-Mor to qualify for
any quarterly rebate hereunder. Notwithstanding anything herein to the contrary,
the quarterly McKesson Select Generics minimum purchase volume of [ * ] required
to obtain the above-specified rebate will be waived for the period between the
Select Implementation Date as referenced above and March 31, 2000, and with
respect to such period the following rebate payment percentages shall apply:
|X| [ * ]% if net McKesson Select Generics purchase volume is less than
$[ * ].
|X| [ * ]% if net McKesson Select Generics purchase volume is $[ * ] or
greater.
Rebate payments pursuant to this Section 20 will be made to Phar-Mor's corporate
offices within 30 days of the end of each quarter.
a. Market Competitiveness
----------------------
McKesson shall provide a Select Generics Benchmark each quarter to
ensure Phar-Mor of the market competitiveness of the McKesson Select
Generics Program.
b. Service Level
-------------
McKesson will ensure a [ * ] service level, as defined in Section 13.A
of the Supply Agreement for products purchased on the McKesson Select
Generics Program. If McKesson fails to meet this [ * ]% service level
for Select Generics Program purchases for two (2) consecutive quarters,
then McKesson will pay Phar-Mor an amount equal to [ * ] basis points
([ * ]%) of Phar-Mor's total Select Generics purchases (net of returns,
allowances and rebates) during the subject period within fifteen (15)
days following Phar-Mor's demand for same.
c. New-to-Market Generics Features
-------------------------------
|X| Stocking allowances / slotting fees on New-to-Market products
will be passed to Phar-Mor when made available to McKesson
from the manufacturer.
|X| Free goods and/or automatic shipment for New-to-Market
products will be provided to Phar-Mor when made available to
McKesson from the manufacturer.
10. Section 21. Repack Pharmaceuticals will be deleted in its entirety and
-----------------------
replaced by the following:
Repack Pharmaceuticals
----------------------
A comprehensive program will be made available to Phar-Mor for repacked
pharmaceuticals. Stores shall be net-billed with an additional volume
rebate to be paid to Phar-Mor headquarters, each quarter.
Quarterly RxPak Volume Rebate % on
(net of returns, allowances & rebates) Net RxPak Volume
-------------------------------------- ----------------
Less than $ [ * ] [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] million and above [ * ]%
11. The reimbursement formula specified at the end of Section 15 of the
Supply Agreement shall be deleted in its entirety and replaced with the
following:
|----- -----| |----- -----|
| Total amount of On-Site | | Number of months remaining |
| Support Monies paid by | | in the then current Contract |
| McKesson to Phar-Mor for | times | year upon date of termination |
| the then current Contract Year| | ----------------------------- |
| | | 12 |
|----- -----| |----- -----|
12. Provided that all of Phar-Mor's material contractual commitments
required under this Supply Agreement have been met for the then
concluding Contract Year as of each of the designated dates below,
McKesson will provide to Phar-Mor an annual compliance payment in
accordance with the following schedule:
$[ * ] payable November 15, 2000
$[ * ] payable November 15, 2001
$[ * ] payable November 15, 2002
$[ * ] payable November 15, 2003
$[ * ] payable November 15, 2004
$[ * ] payable November 15, 2005
In the event that Phar-Mor fails to qualify for any of the
above-specified payments due to nonperformance of its material contract
commitments in any given Contract Year, that particular payment will be
deemed forfeited and McKesson will have no liability or obligation to
subsequently make such payment available to Phar-Mor.
13. The Supply Agreement between Pharmhouse Corporation and the McKesson
U.S. Healthcare division of McKesson Corporation, dated May 1, 1998,
shall be deemed terminated upon the execution of this Amendment. No
damages or other amounts, other than trade payables and McKesson
PaySystem receivables, shall be owed to McKesson by Pharmhouse
Corporation or by Phar-Mor, Inc. or its subsidiaries or affiliates
based on that Supply Agreement.
14. All terms and conditions of this Amendment shall be deemed effective as of
July 1, 1999.
15. Except as modified above, the Supply Agreement remains unchanged and in full
force and effect.
IN WITNESS WHEREOF the parties have caused this Amendment to the Supply
Agreement to be duly executed as, of the day and year specified above.
PHAR-MOR, INC. LLC AND ITS AFFILIATES, McKESSON DRUG COMPANY,
BY PHAR-MOR, XXX.XXX a division of McKesson HBOC, Inc.
By: /s/ Xxxxx Xxxxxxxx By: /s/ Xxxx X. Xxxxxxx
------------------ -------------------
Name: Xxxxx Xxxxxxxx Name: Xxxx X. Xxxxxxx
----------------- -----------------
Title: President & COO Title: Group President, Retail
--------------- and Customer Operations
-----------------------
Date: November 5, 1999 Date: November 10, 1999
---------------- -----------------
dc-186344
