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Exhibit 10.26
ADDENDUM NO. 1 TO
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PHARMACEUTICAL SERVICES AGREEMENT
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This Addendum No. 1 to Pharmaceutical Services Agreement is made as of
April __, 1999 (the "Execution Date"), between Kmart Corporation, whose
principal address is 0000 Xxxx Xxx Xxxxxx Xxxx, Xxxx, Xxxxxxxx 00000
(hereinafter, "Kmart") and Cardinal Health* (consisting of those corporate
entities defined as such on the signature page), whose principal business
address is 0000 Xxxxxxxx Xxxxx, Xxxxxx, Xxxx 00000 (collectively, "Cardinal
Health").
BACKGROUND INFORMATION
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1. Kmart and Cardinal Health are parties to that certain Pharmaceutical
Services Agreement (the "Original Agreement") dated as of August 1, 1996.
2. Kmart and Cardinal Health each desire to amend the Original Agreement as
set forth in this addendum to the Original Agreement (this "Addendum No. 1"
and, together with the Original Agreement, the "Agreement").
STATEMENT OF AGREEMENT
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Cardinal Health and Kmart (the "Parties") acknowledge the accuracy of
the above Background Information and hereby agree as follows:
1. Subsection (b) of Section 2, Supplemental Advertising Support, and the
portions of the Section 2 Disclosure Schedule pertaining to subsection (b) of
Section 2, will be deleted in their entirety. Subsection (b) of Section 2 will
be replaced by the following:
(b) SUBSEQUENT ADVERTISING PROGRAM FUNDS. Cardinal Health will
deliver payment to Kmart in the dollar amount ("Subsequent Advertising
Program Funds") set forth in the Addendum to Section 2 Disclosure
Schedule within fifteen business days of the Execution Date of this
Agreement. The Subsequent Advertising Program Funds will be used by
Kmart for continuation of an advertising campaign to promote Kmart's
pharmacy program. If this Agreement is terminated prior to the eighth
anniversary of the Commencement Date other than (i) termination by
Kmart for cause pursuant to the procedures outlined in Section 20 or
(ii) as a result of Kmart having purchased from Cardinal Health
consigned Rx Products, Xxxx Xxxxxxxx vials, glucose monitors, glucose
test strips, insulin, syringes, and lancets from and after August 1,
1998 having a total aggregate purchase price of $13 billion, then Kmart
will promptly refund to Cardinal Health a portion of the Subsequent
Advertising Program Funds on the terms and subject to the conditions
described in the Addendum to Section 2 Disclosure Schedule.
2. Subsection (b) of Section 5 will be deleted in its entirety and replaced by
the following:
AFTER CONSIGNMENT EFFECTIVE DATE. After the Consignment
Effective Date and prior to such time as the Parties have implemented
the Central Inventory Management Program (defined below), replenishment
orders for the Rx Products will continue to be initiated by the Stores,
consistent with the procedures described in Section 5(a) and subject to
the review of Cardinal Health. It is understood and agreed between the
Parties that the inventory of Rx Products held at the Stores will be
managed at a level designed to achieve an average number of inventory
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"turns" as set forth below (the "Inventory Turns Target") during each
of the contract years of this Agreement.
CONTRACT YEAR INVENTORY BONUS
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TURNS TARGET INVENTORY
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WITHOUT TURNS TARGET
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CIMP
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Year 1 11 N/A
Year 2 11 N/A
Year 3 9.2 10.5
Year 4 9.2 11.5
Year 5 9.2 12
Year 6 9.2 12
Year 7 9.2 12
Year 8 9.2 12
For purposes of this Agreement, inventory turns will be calculated on
an aggregate basis each contract year based upon the average weekly
consigned inventory during such year (taking into account inflation
recognition as described in Paragraph 3 of Subsection (b) of Section 8)
compared against dispensing of consigned inventory during the same
period. If for any of the contract years prior to the implementation of
the Central Inventory Management Program, the actual inventory turns
achieved is less than the Inventory Turns Target, then Kmart will pay
Cardinal Health a service charge (the "Inventory Turns Service Charge")
of 10% on such excess inventory within 5 business days of Cardinal
Health's invoice for same. In the event that the actual inventory turns
achieved for any contract year equal or exceed the Bonus Inventory
Turns Target set forth above, then Cardinal Health will pay Kmart a
bonus equal to that number of basis points as set forth in the
following chart times the sales of consigned inventory during the
contract year for which the Bonus Inventory Turns Target was achieved.
Beginning with Contract Year 5
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Actual inventory turns Inventory turns bonus
achieved
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12 0.10% (10 basis points)
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12.5 0.13% (13 basis points)
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13 0.17% (17 basis points)
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13.5 0.19% (19 basis points)
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14 0.22% (22 basis points)
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14.5 0.23% (23 basis points)
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15 0.245% (24.5 basis points)
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15.5 0.25% (25 basis points)
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16 0.26% (26 basis points)
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16.5 0.265% (26.5 basis points)
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17 0.27% (27 basis points)
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The inventory turns bonus for contract year 3 shall be as set
forth above, provided, however, that for contract year 3, the inventory
turns bonus shall equal 0.10% (10 basis points) for actual inventory
turns achieved of at least 10.5; 0.13% (13 basis points) for actual
inventory turns achieved of at least 11.5; and 0.17% (17 basis points)
for actual inventory turns achieved of at least 12.5.
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The inventory turns bonus for contract year 4 shall be as set
forth above, provided, however, that for contract year 4, the inventory
turns bonus shall equal 0.10% for actual inventory turns achieved of at
least 11.5 and 0.13% (13 basis points) for actual inventory turns
achieved of at least 12.5.
In calculating the inventory turns for purposes of this
Section, the book value of inventory will not be included for up to 100
new Stores each year for six months following the opening of each such
new Store. A newly opened Store is a "new Store" if it is opening
without previously existing Kmart pharmacy files.
The Parties acknowledge that the actual inventory turns
achieved for the second contract year was less than the Inventory Turns
Target for that contract year. The Parties agree that the book
inventory balance for the second contract year is equal to
$177,024,894, subject by both Parties to physical verification and
inclusion of the physical inventory results/adjustments through the
second contract year. However, Cardinal Health has agreed to waive the
service charge payable by Kmart in connection with the second contract
year in consideration of the agreements set forth in this Addendum. The
Parties agree that the value of such waiver is $4,489,733 (the
"Inventory Turns Relief").
Cardinal Health will develop a central inventory management
program (the "Central Inventory Management Program"), pursuant to which
Cardinal Health will assume responsibility for managing the ordering
process for the consigned Rx Product inventories for the Stores. Kmart
will reimburse Cardinal Health one half of the cost of such development
for the Central Inventory Management Program (including without
limitation costs associated with labor, consulting fees, and
development costs) up to an amount not to exceed $350,000, which amount
shall be payable to Cardinal Health one-half upon the conclusion of the
first beta test conducted in connection with the Central Inventory
Management Program and one-half upon the first installation of the
Central Inventory Management Program in a Kmart Store, within fifteen
(15) days of the date of Cardinal Health's invoice to Kmart therefor.
The Central Inventory Management Program will be designed by Cardinal
Health, which will exercise reasonable efforts to provide each Kmart
Store with an average monthly Service Level per Store as described in
Section 1 of the Original Agreement. In connection with development and
implementation of the Central Inventory Management Program, Kmart
agrees to install ScriptLINE as to third party transactions in all
Kmart Stores no later than May 1, 1999.
On or before March 1, 2000, the Parties will implement the
Central Inventory Management Program developed by Cardinal Health in
the Stores; provided, however, the Central Inventory Management Program
will only be implemented in the Stores after successful beta testing,
such that the parties agree that the Central Inventory Management
Program processes the ordering and replenishment of Rx Products for the
Stores to provide an average monthly Service Level per Store as
described in Section 1 of the Original Agreement. If the Central
Inventory Management Program is implemented in all Stores by March 1,
2000 and Kmart is operating the Central Inventory Management Program in
accordance with the Accuracy Procedures as described below, the
Inventory Turns Service Charge will be discontinued for the fourth
contract year, provided that Kmart's actual inventory turns equal or
exceed 9.2 for the period of the fourth contract year prior to
implementation of the Central Inventory Management Program. The
Inventory Turns Service Charge will be reinstated in the event that the
Accuracy Procedures cease to be complied with. If the Central Inventory
Management Program is not implemented by March 1, 2000, for any reason,
then the Inventory Turns Service Charge will apply to the fourth
contract year and will continue for each contract
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year thereafter as described above for each full contract year during
which the Central Inventory Management Program is not implemented for
such full year.
The Parties acknowledge that the Central Inventory Management
Program will only work effectively if the Kmart pharmacists use the
Central Inventory Management Program in a consistent and accurate
manner. Therefore, Kmart agrees that inventory control objectives will
be included as a major initiative for Kmart's Regional and District
pharmacy managers. In addition, Kmart agrees that the Kmart pharmacists
will use all reasonable efforts to use the Central Inventory Management
Program properly (based on a mutually agreeable operating plan that is
jointly developed by both Parties), including without limitation
adhering to the following "Accuracy Procedures": (1) not overriding the
system with telxon or manual orders except for customer service needs
or in the event the Central Inventory Management Program is not
functioning properly, (2) conducting annual physical inventory counts
for each Store which will include a physical inventory at each Store by
Kmart prior to the implementation of the Central Inventory Management
Program, (3) conducting quarterly cycle counts (as detailed below), (4)
submitting to Cardinal Health accurate Store transfer data, and (5)
submitting to Cardinal Health all Unmerchantable third-party returns as
they are sent from the Stores to the Designated Processor. Cardinal
Health will use all reasonable efforts to manage the inventory records
in connection with the Central Inventory Management Program and
maintain the viability of the system. In the event that the system
becomes inoperable, then the affected Stores may order via telxon units
until such time as the system becomes operable again. Upon the system
again becoming operable, then the Stores will resume ordering pursuant
to the Central Inventory Management Program.
In addition to the inventories described in Section 8(b), in
order to establish and maintain accurate on-hand inventory records for
the Central Inventory Management Program, Kmart agrees to provide
Cardinal Health on a daily basis with all dispensing activity at
Kmart's expense, including without limitation third party and cash
transactions, and to perform an annual physical inventory in all Kmart
Stores with consigned Rx Products. Inasmuch as the initial dispensing
activity information supplied by Kmart to Cardinal Health may be in
batch format and will be supplied the day following the dispensing
activity, and inasmuch as such a delay will limit but not eliminate the
auditability and control of accurate on-hand inventory quantities
information, Kmart agrees to use reasonable efforts to pursue a method
of supplying real-time dispensing activity information to Cardinal
Health. In the event that Kmart is able to provide real-time dispensing
activity information to Cardinal Health and ScriptLINE becomes the
mechanism to feed real-time cash dispensing activity information to
Cardinal Health for the Central Inventory Management Program, then for
all cash transaction claims processed through ScriptLINE, Kmart will
pay Cardinal Health an annual fee equal to the lesser of (i) $0.01 per
cash transaction claim processed (the "Cash Claim Charge") or (ii)
$250,000 per contract year. In the event that the total Cash Claim
Charges for a contract year exceed $250,000, then Cardinal Health will
not charge Kmart the amount by which the total Cash Claim Charges for
that contract year exceed $250,000. Kmart will pay Cardinal Health the
appropriate Cash Claim Charge within thirty (30) days following the end
of each contract year. Kmart shall in all events be responsible to pay
any and all switching fees and the ScriptLINE Claim Transaction Fees,
if any, associated with all cash transactions. In the event that Kmart
is unable to provide all real-time dispensing activity information to
Cardinal Health for the Central Inventory Management Program, then any
Inventory Turns Target Bonus earned by Kmart will be shared with
Cardinal on an 80/20 basis (80% Kmart/20% Cardinal Health), up to a
maximum allocation to Cardinal Health of $250,000 for each contract
year, to help support the ongoing cost of maintaining the Central
Inventory Management Program. Cardinal Health's allocation
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of the Inventory Turns Target Bonus will be deducted from payment of
the Inventory Turns Target Bonus to Kmart.
Each Kmart Store will perform a monthly physical inventory
cycle count ("ICC") in metric unit detail. Each ICC will be performed
for not more than 50 Rx Products randomly selected by Cardinal Health
for each ICC (the "ICC Selected Products") to track the compliance of
Kmart Stores with respect to accurate on-hand quantities. Each ICC will
be performed in metric units and submitted to Cardinal Health in a
mutually agreeable format within 5 days of the end of each designated
month. During the beta testing of the Central Inventory Management
Program, the parties will mutually develop procedures for dealing with
discrepancies in the ICC physical count as compared to the records of
the Central Inventory Management Program.
All Non Rx Products will continue to be ordered and delivered
as set forth in Section 5(a) of the Original Agreement, both before and
after the Consignment Effective Date, but nothing contained in this
Agreement will require Kmart to purchase Non Rx Products from Cardinal
Health.
3. Section 11 of the Original Agreement is hereby deleted in its entirety and
replaced by the following:
Cardinal Health will provide item catalog and pricing information to
Kmart in a mutually agreed upon electronic data interchange format.
This item catalog will serve as the source for product cost information
used to determine the payment amounts due to Cardinal Health. Kmart
will make available to Cardinal Health information necessary to
reconcile dispensing activity with the payment made to Cardinal Health.
This information will be made available in mutually agreed upon
electronic data interchange format.
During the implementation period and up to sixty (60) days following
the full implementation of the Central Inventory Management Program in
all of the Kmart Stores (the "no termination period"), in the event
that the automated ordering process of the Central Inventory Management
Program is preventing the Central Inventory Management Program from
satisfying the Service Levels set forth in Section 1 of the Original
Agreement, then the Parties reserve the right to mutually decide to
temporarily cease using the automated ordering process in order to cure
any material issues preventing the Central Inventory Management Program
from satisfying such Service Level targets. During the no termination
period, Kmart shall have the right to order product via telxon as in
effect prior to implementation of the Central Inventory Management
Program with no additional charge. In the event that the Central
Inventory Management Program is not satisfying the Service Level
targets during the no termination period and the Parties decide to
temporarily cease using the automated ordering process of the Central
Inventory Management Program for a third time, then either Party may
terminate the Cardinal Health designed Central Inventory Management
Program and Kmart can order via telxon as in effect prior to
implementation of the Central Inventory Management Program at no
additional charge. Following the no termination period, in the event
that the automated ordering process of the Central Inventory Management
Program prevents the Central Inventory Management Program from
satisfying the Service Levels set forth in Section 1 of the Original
Agreement for three (3) consecutive months, then either Party may
terminate the Cardinal Health designed Central Inventory Management
Program and Kmart can order via telxon as in effect prior to the
implementation of the Central Inventory Management Program at no
additional charge.
If the Cardinal Health designed Central Inventory Management Program is
terminated for any reason, then Kmart shall have the right to select an
alternative auto-replenishment system. In
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the event that Kmart selects an alternative auto replenishment system,
which system must be agreeable to Cardinal Health, then Cardinal Health
will credit up to $350,000 of the development fees paid by Kmart
towards this new system once installed. If Kmart chooses not to pursue
(it being understood that Kmart has no obligation to pursue) an
alternative auto replenishment system, then Cardinal Health reserves
the right to pursue alternative auto replenishment solutions agreeable
to Kmart at Cardinal Health's expense and will not refund any portion
of the development cost to Kmart.
4. The Section 7 Disclosure Schedule is hereby deleted in its entirety and
replaced by the Addendum to Section 7 Disclosure Schedule.
5. (a) The first paragraph in Section 8(b) is hereby deleted and replaced with
the following:
After Consignment Effective Date. From and after the date of this
Addendum No. 1, payment by Kmart for Rx Products will be made in good
and usable funds on the third banking day following the sale or
dispensing of Rx Products by the Stores based on the dispensing data
received at Kmart's Headquarters from the Stores (such third banking
day, the "Consigned Merchandise Prompt Payment Date", and, together
with the Non Consigned Merchandise Prompt Payment Date, the "Prompt
Payment Date"). In consideration for the change in Consignment
Merchandise Prompt Payment Date contained in this Addendum, Kmart will
pay Cardinal an additional day of "float" within 15 days of the
Execution Date of this Addendum No. 1. The amount of such additional
float for each contract year will be determined on the first day of
each contract year by calculating 1 day of average sales and dispensing
of Rx Products by the Stores for the immediately preceding contract
year, and subtracting the amount held by Cardinal as float as of the
date of such calculation. The average sales and dispensing of Rx
Products by the Stores for any contract year will be calculated by
dividing the aggregate dollar volume of sales and dispensing of Rx
Products for all Stores during the applicable contract year by 360. The
amount of additional float will be adjusted up or down each contract
year based upon 1 day of average sales and dispensing of Rx Products by
the Stores for the immediately preceding contract year and will be paid
or refunded by the 15th of the month immediately following the end of
the contract year. Both Parties acknowledge that Cardinal Health
withheld $3 million at the signing of the Original Agreement and that
these funds are considered "float" for purposes of this calculation.
Both Parties agree that the additional amount of float resulting from
purchases in the second contract year for the third contract year is
equal to $1,016,000 and Kmart agrees to pay Cardinal Health such amount
no later than 15 days following the Execution Date of this Addendum. In
order to facilitate proper accounting and record-keeping, the Parties
will establish procedures to document the product movement at the time
of delivery.
(b) The following language is hereby inserted after the third sentence of the
third paragraph of Section 8(b):
As the Central Inventory Management Program is implemented by both
Parties in the Kmart Stores, the inflation factor will be calculated,
based upon the perpetual inventory level for each Store, by multiplying
any change in price of any Rx Product by the number of units of
consigned inventory of that Rx Product on-hand on the day the price
changes. The total amount of the calculated daily changes for each
month will be added or subtracted from book inventory for that month
and included in the calculation of book inventory for that contract
year. Cardinal will calculate and forward the amount of such change to
Kmart by Store. The inflation factor calculation methodology utilized
prior to implementation of the Central Inventory Management Program
will be discontinued for each Store as the Central Inventory
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Management Program is implemented for that Store; provided, however,
that reconciliation of the inflation factor for that period prior to
each Store implementing the Central Inventory Management Program shall
be conducted based upon the inflation factor calculation methodology
prior to such implementation, notwithstanding the fact that such
reconciliation may occur after such implementation.
6. (a) As of the effective date of this Addendum No. 1, the first sentence of
the last paragraph of the Section 9 Disclosure Schedule is hereby deleted in its
entirety and replaced with the language set forth in subsection (a) of the
Addendum to Xxxxxxx 0 Xxxxxxxxxx Xxxxxxxx.
(b) The fifth sentence of the last paragraph of the Section 9 Disclosure
Schedule is hereby deleted in its entirety and replaced by the language set
forth in subsection (b) of the Addendum to Section 9 Disclosure Schedule.
7. (a) The language set forth in subsection (a) of the Addendum to Section 14
Disclosure Schedule is hereby inserted in the Section 14 Disclosure Schedule
immediately prior to the introductory language for the Examples which begin with
the Calculation of Non-Alliance Chain Weighted Average Price.
(b) The language set forth in subsection (b) of the Addendum to Section 14
Disclosure Schedule is hereby inserted in the Section 14 Disclosure Schedule
immediately prior to the General Terms section.
(c) The second paragraph under the General Terms section of the Section 14
Disclosure Schedule is hereby deleted in its entirety and replaced with the
language set forth in subsection (c) of the Addendum to Section 14 Disclosure
Schedule.
(d) The language set forth in subsection (d) of the Addendum to Section 14
Disclosure Schedule is hereby inserted in the Section 14 Disclosure Schedule
immediately following the second paragraph under the General Terms section.
(e) The fourth-to-last paragraph of the Section 14 Disclosure Schedule
under the General Terms section is hereby deleted in its entirety and replaced
by the language set forth under subsection (e) of the Addendum to Section 14
Disclosure Schedule.
8. (a) Section 16 of the Original Agreement is hereby deleted in its entirety
and replaced by the following:
SECTION 16. RETURNS OF MERCHANTABLE AND UNMERCHANTABLE RX PRODUCTS AND
NON RX PRODUCTS.
(a) NON RX PRODUCTS. The Parties recognize and acknowledge
that the arrangements described in this Agreement could result in
products ordered in error, mispicks, shortages, etc., and that Non Rx
Products may need to be returned to Cardinal Health. Therefore, both
prior to and after the implementation of the Central Inventory
Management Program, Cardinal Health will accept Merchantable Non Rx
Products (defined below) for return from Kmart Stores in accordance
with the Cardinal Health Return Goods Policy for Non-Consigned
Inventory set forth in the Section 16 Disclosure Schedule.
Notwithstanding anything to the contrary contained elsewhere in this
Agreement, Cardinal Health will not be required to and will not accept
for return any Unmerchantable Non Rx Products back through its
distribution centers. Kmart will return all Unmerchantable Non Rx
Products through a third party return goods processor (the "Designated
Processor") as described in subsection 16(c) below. "Merchantable Non
Rx Products" will be determined by Cardinal Health based upon its
ability to return the item to its inventory for resale in the normal
course of its business
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without special preparation, testing, handling, or expense and excludes
without limitation the specific items set forth in the definition of
Unmerchantable Non Rx Products set forth below. "Unmerchantable Non Rx
Products" shall mean as to Non Rx Products items which Cardinal Health
is unable to return to its inventory for resale in the normal course of
its business without special preparation, testing, handling, or expense
and includes without limitation the following: (i) any item which has
been used or opened, is only partially complete, or is without all
original packaging, labeling, inserts, or operating manuals; (ii)
short-dated (defined as less than 180 days from expiration), outdated,
or seasonal product (including without limitation sun protection
products, back-to-school supplies, and cough and cold displays); (iii)
product that is stickered, marked, damaged, defaced, or otherwise
cannot readily be resold by Cardinal Health for any reason; (iv) any
item purchased on a "special order" basis, including non-stock orders
and drop shipments; (v) any sterile or refrigerated merchandise, unless
Cardinal Health is specially assured that such merchandise was properly
stored and protected at all times and such merchandise is returned
separately in a package marked as such and accompanied by a separate
credit request form; (vi) any low stability product or other products
which are usually sensitive to temperature and handling conditions; and
(vii) any product not intended for return to a wholesaler in accordance
with the return policies of the applicable manufacturer.
(b) RX PRODUCTS. Both prior to and after the implementation of
the Central Inventory Management Program, Cardinal Health will accept
Merchantable Rx Products (defined below) for return from Kmart Stores
in accordance with the Cardinal Health Return Goods Policy for
Consigned Inventory set forth in the Section 16 Disclosure Schedule.
Notwithstanding anything to the contrary contained elsewhere in this
Agreement, both prior to and following implementation of the Central
Inventory Management Program, Cardinal Health will not be required to
and will not accept for return any Unmerchantable Rx Products back
through its distribution centers. Kmart will return all Unmerchantable
Rx Products through the Designated Processor as described in subsection
16(c) below. "Merchantable Rx Products" will be determined by Cardinal
Health based upon its ability to return the item to its inventory for
resale in the normal course of its business without special
preparation, testing, handling, or expense and excludes without
limitation the specific items set forth in the definition of
Unmerchantable Rx Products set forth below. "Unmerchantable Rx
Products" shall mean as to Rx Products items which Cardinal Health is
unable to return to its inventory for resale in the normal course of
its business without special preparation, testing, handling, or expense
and includes without limitation the following: (i) any item which has
been used or opened, is only partially complete, or is without all
original packaging, labeling, inserts, or operating manuals; (ii)
short-dated (defined as less than 270 days from expiration), outdated,
or seasonal product (including without limitation flu vaccines); (iii)
product that is stickered, marked, damaged, defaced, or otherwise
cannot readily be resold by Cardinal Health for any reason; (iv) any
item purchased on a "special order" basis, including non-stock orders
and drop shipments; (v) any sterile or refrigerated merchandise, unless
Cardinal Health is specially assured that such merchandise was properly
stored and protected at all times and such merchandise is returned
separately in a package marked as such and accompanied by a separate
credit request form; (vi) any low stability product, including Epogen,
Eminase, or other products which are usually sensitive to temperature
and handling conditions; and (vii) any product not intended for return
to a wholesaler in accordance with the return policies of the
applicable manufacturer.
On a contract quarterly basis, Kmart Stores will inspect Rx
Products on site and remove and return to Cardinal Health those
unopened packages of Merchantable Rx Products which are not anticipated
to be used within 3 months (based on previous demand history) and have
dating greater than 270 days (9 months). Such returns will be made in
accordance with the Section 16 Disclosure Schedule.
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All Unmerchantable Rx Products processed through the
Designated Processor will be treated as having been sold or dispensed
by Kmart. The aggregate purchase price for all Unmerchantable Rx
Products processed through the Designated Processor will be calculated
as of the last day of the month in which the return is processed by the
Designated Processor (the "Stock Rotation Amount"), subject to
verification by both Parties. Each Party will adjust book inventory to
reflect the Stock Rotation Amount as soon as it is verified by both
Parties. The Designated Processor will establish an estimated
returnable value ("ERV") for the Unmerchantable Rx Products and Kmart
will pay Cardinal Health an amount equal to the difference between the
ERV and the Stock Rotation Amount, in good and usable funds on or
before the 10th business day immediately following completion of the
reconciliation process for each month. On a monthly basis, the Parties
will reconcile the aggregate credit received from manufacturers against
the ERV. Such reconciliation will include all applicable credit
memoranda and other credits received, as well as all other deductions
taken by Cardinal Health on behalf of Kmart or reversed by the
manufacturers. A final reconciliation of the aggregate credit received
from manufacturers against the ERV will be performed and completed
within 90 days of the termination date of this Agreement. The Party
owing the other Party as a result of the final reconciliation will pay
the non-owing Party within 15 days following completion of such final
reconciliation. Credit (evidenced by credit memoranda or otherwise) for
manufacturers who are in bankruptcy will not be credited for purposes
of calculating the Stock Rotation Amount. Cardinal Health will use all
reasonable efforts to work with any manufacturer in bankruptcy to
recognize value on behalf of Kmart from such manufacturer for returned
Rx Product.
Following termination of this Agreement, both Parties will
continue to process any Unmerchantable Rx Products for which processing
began prior to termination of the Agreement and Kmart will remit to
Cardinal Health any portion of the Stock Rotation Amount which has not
previously been recovered by Cardinal Health, including without
limitation any shortfall of the ERV compared to recovered credits
during the term of this Agreement.
(c) THIRD PARTY RETURN GOODS PROCESSOR. Kmart will
notify Cardinal Health of Kmart's choice of Designated Processor. Kmart
will forward all Unmerchantable Non Rx Products and Unmerchantable Rx
Products (collectively, "Unmerchantable Products") directly to the
Designated Processor and not to Cardinal Health. Cardinal Health will
return to Kmart any Unmerchantable Products forwarded to Cardinal
Health from Kmart.
(b) The "General Policy" section of the Non-Consigned Inventory section
of the Section 16 Disclosure Schedule is hereby deleted and replaced in its
entirety by the language set forth in Non-Consigned portion of the Addendum to
Section 16 Disclosure Schedule.
(c) A new Consigned Inventory section will be added to the end of the
Section 16 Disclosure Schedule, which will read as set forth in the Consigned
Portion of the Addendum to Section 16 Disclosure Schedule.
9. The following is hereby added as an additional paragraph at the end of
Section 17:
Neither Kmart nor Cardinal Health will distribute Rx Products from
Kmart Store locations to third parties, other than the dispensing of Rx
Products by licensed Kmart pharmacists pursuant to valid prescriptions
in accordance with its customary business practice or as otherwise
permitted by applicable laws and regulations.
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10. Section 20 of the Original Agreement will be amended as follows:
(a) The first sentence of Section 20 will be deleted and replaced by
the following:
The term of this Agreement will commence as of August 1, 1996 (the
"Commencement Date") and will continue thereafter until the earlier of:
(a) the eighth anniversary of the Commencement Date or (b) such time as
Kmart has purchased from Cardinal Health consigned Rx Products, Xxxx
Xxxxxxxx vials, glucose monitors, glucose test strips, insulin,
syringes, and lancets from and after August 1, 1998 having an aggregate
purchase price of $13 billion, with the option to extend the term for
successive additional periods of one year each upon the mutual written
consent of the Parties.
(b) The last paragraph of Section 20 will be deleted in its entirety
and replaced by the following:
No termination of this Agreement (including at the end of the term as
stated above) will be effective until such time as Kmart has paid all
amounts owed to Cardinal Health upon such termination, including (if
applicable) the Early Termination Fee, the reimbursement of any
unamortized portion of the Initial Advertising Program Funds and the
Subsequent Advertising Program Funds, payment of the unamortized
portion of the $1,300,000 COGS Relief, the unamortized portion of the
$4,489,733 Inventory Turns Relief, and the payment for all Merchandise
previously purchased by Kmart and the payment for, or delivery back to
Cardinal Health of, all Merchandise delivered to or held by Kmart on
consignment as described in the Purchase and Consignment Agreement,
which amounts will automatically become due and payable on or before
the effective date of the termination (unless previously due and
payable), whether with or without cause. For purposes of this Section
20, the unamortized portion of the COGS Relief for all contract
quarters prior to the 21st contract quarter shall equal $1,300,000 and
for all quarters starting with the 21st contract quarter and thereafter
shall equal $1,300,000 times a fraction (the "Fraction") the numerator
of which shall equal $13 billion minus the aggregate purchase price of
consigned Rx Products, Xxxx Xxxxxxxx vials, glucose monitors, glucose
test strips, insulin, syringes, and lancets purchased by Kmart from
Cardinal Health from and after August 1, 1998 and the denominator of
which shall equal $13 billion. For purposes of this Section 20, the
unamortized portion of the Inventory Turns Relief for all contract
quarters prior to the 21st contract quarter shall equal $4,489,733 and
for all quarters starting with the 21st contract quarter and thereafter
shall equal $4,489,733 times the Fraction. For purposes of this Section
20, the unamortized portion of the Initial Advertising Program Funds
and the Subsequent Advertising Program Funds shall be as described in
the Addendum to Section 2 Disclosure Schedule.
11. A new Section 36 is hereby added to the Agreement which reads as follows:
After the execution of this Addendum No. 1 but before March 1, 2000,
Cardinal Health will employ an employee who will serve as the Supply
Inventory Control Supervisor (the "Inventory Control Supervisor") who
will serve as a liaison between Cardinal Health and Kmart and whose
duties will include but not be limited to assistance in managing
Kmart's inventory levels in the Stores. The Inventory Control
Supervisor's office will be located at the corporate offices of Kmart
in Troy, Michigan. Kmart agrees to give the Inventory Control
Supervisor access to Kmart records and systems pertinent to the control
of consigned inventory. Notwithstanding such fact, the Inventory
Control Supervisor's salary and benefits will be paid by Cardinal
Health and the Inventory Control Supervisor shall be an employee of
Cardinal Health and subject to Cardinal Health's employment policies.
During the term of this
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Agreement and for a period of two years thereafter, Kmart agrees not to
directly or indirectly employ, or solicit the employment of, (whether
as an employee, officer, director, agent, consultant or independent
contractor) the Inventory Control Supervisor. The Inventory Control
Supervisor will sign a similar agreement prior to beginning duties
under this Agreement.
12. A new Section 37 is hereby added to the Agreement which reads as follows:
All Kmart Stores will subscribe to ScriptLINE for data collection and
the reporting of dispensing data. The parameters of Kmart's
participation in ScriptLINE are as set forth in the Section 37
Disclosure Schedule.
13. All capitalized terms contained in this Addendum No. 1 but not defined
herein shall have the same meaning as that set forth in the Original Agreement.
14. Except to the extent otherwise set forth in this Addendum No. 1, the terms,
conditions and provisions of the Original Agreement are unchanged and remain in
full force and effect.
Kmart Cardinal Health*
By: /s/ Xxxxxx Xxxxxxxxxxx By: /s/ Xxxxxxx X. Xxxxxxxx
----------------------------- ------------------------------------
Print Name: Xxxxxx Xxxxxxxxxxx Print Name: Xxxxxxx X. Xxxxxxxx
-------------------- ----------------------------
Title: President Title: SVP Retail Sales & Marketing
-------------------- ----------------------------
*The term "Cardinal Health" shall include the following affiliated companies:
XxxXxx, Inc., an Ohio corporation (Dublin, Ohio); Cardinal Syracuse, Inc., a New
York corporation (Syracuse, New York); Marmac Distributors, Inc., a Connecticut
corporation (Hartford, Connecticut); Xxxxx X. Xxxx, Inc., a Massachusetts
corporation, (Peabody, Massachusetts); Ohio Valley-Clarksburg, Inc., a Delaware
corporation (Wheeling, West Virginia); Cardinal Southeast, Inc., a Mississippi
corporation (Madison, Mississippi); Xxxxxxxx Distribution Corporation, a
Delaware corporation (Folsom, California); Xxxxxxxx-Xxxxxxx, Inc., an Illinois
corporation (Calumet City, Illinois); Xxxxxxx Inc., a Texas corporation (Waco,
Texas); National PharmPak Services, Inc., an Ohio corporation (Zanesville,
Ohio); Renlar Systems, Inc., a Kentucky corporation (Lexington, Kentucky);
Medical Strategies, Inc., a Massachusetts corporation (Dublin, Ohio); Cardinal
Health Systems, Inc., an Ohio corporation (Dublin, Ohio) and any other
subsidiary of Cardinal Health, Inc., an Ohio corporation ("Cardinal Health,
Inc."), as may be designated by Cardinal Health, Inc.
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