Exhibit 10.01
[***] indicates the omission of confidential portions for which confidential
treatment has been requested. Such confidential information has been filed
separately with the Commission.
SECOND AMENDMENT TO PHARMACEUTICAL SERVICES AGREEMENT
This Second Amendment to Pharmaceutical Services Agreement ("Second
Amendment") is between Kmart Corporation ("Kmart") and Cardinal Health*
(consisting of those corporate entities defined as such on the signature page)
(collectively, "Cardinal").
Background Information
A. Kmart and Cardinal are parties to a Pharmaceutical Services Agreement dated
as of August 1, 1996 (the "Pharmaceutical Services Agreement"). The Original
Agreement was amended by an Addendum No. 1 to Pharmaceutical Services Agreement
dated as of April 30, 1999 (the "Addendum No. 1"). The Pharmaceutical Services
Agreement and the Addendum No. 1 are collectively referred to as the "Original
Agreement".
B. Kmart and Cardinal each desire to amend the Original Agreement as described
in this Second Amendment (this Second Amendment together with the Original
Agreement, the "Agreement").
Statement of Agreement
Cardinal and Kmart (the "Parties") each acknowledge the accuracy of the
Background Information and hereby agree as follows:
1. Service Level.
(a) The second paragraph of section 1 is deleted in its entirety and
replaced with the following:
Cardinal will exercise all commercially reasonable efforts to
provide Kmart with an aggregate adjusted service level ("Service Level") on
all Rx Products as further described in the Section 1 Disclosure Schedule.
Cardinal will provide Kmart with a Service Level report following the end of
each month by Cardinal distribution center (each report to provide a
statement of Service Level on a Store-by-Store basis) and upon Kmart's
reasonable request, Cardinal will provide up to 12 company-wide Service
Level reports per Contract Year.
Throughout this Second Amendment, the term "Contract Year" means each
consecutive twelve (12) month period beginning on the first day of the calendar
month following the Effective Date, and the term "Contract Quarter" means each
consecutive three (3) month period beginning on the first day of the calendar
month following the Effective Date.
(b) The Section 1 Disclosure Schedule is deleted in its entirety
and replaced by the Section 1 Disclosure Schedule attached to this Second
Amendment.
2. Inventory Turns and Inventory Management System. Section 5(b) (as modified
by the Addendum No. 1) is deleted in its entirety and replaced with the
following new Section 5(b):
(i) Inventory Turns Schedule. Each month, Cardinal will
compile an inventory turns schedule that records the activities that
affect the value of the Consigned Inventory,
such as Rx Product delivered to Kmart, payments made by Kmart, a
calculation of the number of inventory turns (as further described in
subsection (ii) below), Shrink (as described in section 11), dispensed
Rx Product, overstock returns, outdate returns, and any other relevant
information (the "Inventory Turns Schedule"). An example of the
Inventory Turns Schedule is attached as the Section 5 Disclosure
Schedule. Each [***], the Parties agree to reconcile the inventory
balances maintained by each Party in their financial records in the
aggregate to the Inventory Turns Schedule. All adjustments (other than
Shrink) that result from such reconciliation will be paid to the
applicable Party within [***] following the end of each [***].
(ii) Inventory Turns. The Parties acknowledge and agree that
the purchase price for Consigned Inventory sold to Kmart is based on
Kmart achieving a certain number of inventory turns each Contract
Quarter (expressed as an annualized figure) (the "Inventory Turns
Target"). In the event that Kmart achieves inventory turns of at least
[***], Cardinal's sole remedy is the [***] defined below. The
Inventory Turns Target will increase from [***] in accordance with the
following schedule:
-------------------------------------------------------------
CONTRACT QUARTER INVENTORY TURNS TARGET
-------------------------------------------------------------
First Contract Quarter [***]
-------------------------------------------------------------
Second Contract Quarter [***]
-------------------------------------------------------------
Third Contract Quarter [***]
-------------------------------------------------------------
Fourth Contract Quarter [***]
-------------------------------------------------------------
Each Contract Quarter thereafter [***]
-------------------------------------------------------------
Kmart may elect to implement a central inventory management
program (the "Inventory Management System") to manage the ordering
process for the Consigned Inventory for the Stores. On and after the
Effective Date, if Kmart elects to implement the Inventory Management
System, each Party will bear its own costs to implement and use the
Inventory Management System. If Kmart elects to implement Cardinal's
central inventory management system to interface with Kmart's existing
PDX inventory capabilities, Cardinal will bear the initial cost of
implementation (including only the software license fee and PDX's
consulting services to implement the software, but excluding training)
up to $[***]. This payment, if made, is a "discount or other reduction
in price" as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose
such payment and any other "discounts or other reductions in price"
received by Kmart from Cardinal under any state or federal program
which provides cost or charge-based reimbursement to Kmart for the
Merchandise purchased by Kmart from Cardinal or as otherwise requested
by a government agency. Kmart will use its best efforts to minimize all
such costs to Cardinal, including but not limited to, negotiating a
software license fee and consulting fees reasonably acceptable to
Cardinal. If Kmart elects to implement the Inventory Management System,
Cardinal and Kmart will work together to develop a procedures manual
for operating the Inventory Management System.
Cardinal will calculate the number of inventory turns each
Contract Quarter, on an annualized basis, in accordance with generally
accepted accounting principles and as illustrated in the Inventory
Turns Schedule attached as the Section 5 Disclosure Schedule. If for
any Contract Quarter the actual inventory turns achieved is less than
the
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Inventory Turns Target, on an annualized basis, [***] (the "[***]"), as
further described below. In the event that the actual inventory turns
achieved for any Contract Quarter [***][***], on an annualized basis,
[***], as further described below.
The [***] will be calculated as follows: [***].
(iii) Pricing Updates; Payment Data. Cardinal will provide at
its sole cost and expense, item catalog and pricing information to
Kmart in the same or substantially the same electronic data interchange
format as provided as of the Effective Date. This item catalog will
serve as the source for product cost information used to determine the
payment amounts due to Cardinal. Kmart will make available to Cardinal
information necessary to reconcile dispensing activity with the payment
made to Cardinal. This information will be made available at [***] sole
cost and expense, in the same or substantially the same electronic data
interchange format as provided as of the Effective Date.
3. Purchase Price.
(a) Section 7 is deleted in its entirety and replaced with the
following:
The purchase price for Merchandise purchased under this
Agreement will be Cardinal's Cost [***] shown in the Cost of Goods
described in the section 7 Disclosure Schedule (the "Cost of Goods").
The term "Cardinal's Cost" for Rx Products means the manufacturer's
published wholesale acquisition cost ("WAC") on the date the
prescription is sold by the Stores. For purposes of this Agreement, a
prescription is sold on the date the prescription is [***]. The term
"Cardinal's Cost" for Non Rx Products means WAC on the date the Non Rx
Products are invoiced by Cardinal.
The Cost of Goods for selected Merchandise, including but not
limited to, Merchandise [***],[***] will be [***]. Merchandise
described in this paragraph is sometimes referred to as "Specially
Priced Merchandise".
Cardinal will recognize and administer manufacturer contracts
between Kmart and any branded manufacturer (collectively, "Manufacturer
Contracts") subject to their continued validity in accordance with
applicable laws and subject to such credit considerations concerning
the applicable manufacturers as Cardinal may reasonably consider
appropriate; however, if manufacturers' chargebacks for contract items
submitted by Cardinal are disallowed, uncollectable, or irreconcilable,
then the applicable charge will be billed back to Kmart and paid by
Kmart within [***] of notice of the applicable charge. Cardinal
reserves the right, at any time, to decline to sell or carry any
manufacturer's merchandise, based upon credit considerations deemed
relevant to Cardinal, commensurate with Cardinal's customary business
practices applicable to all manufacturers. Kmart will notify Cardinal
of all Manufacturer Contracts effective as of the Effective Date, all
new Manufacturer Contracts entered into after the Effective Date, and
all renewals, replacements or terminations of Manufacturer Contracts.
The terms of each such Manufacturer Contract (including modifications,
renewals, and replacements) will become effective no later than three
(3) business days following Cardinal's receipt of verification from the
applicable manufacturer of the new terms. Failure to comply with these
notice requirements will entitle Cardinal to discontinue the service
level
3
provisions herein until thirty (30) days after delivery of accurate
usage data for the new items.
(b) The Section 7 Disclosure Schedule (as modified by Addendum
No. 1) is deleted in its entirety and replaced by the Section 7 Disclosure
Schedule attached to this Second Amendment.
4. Payment Terms. Section 8 (as modified by Addendum No. 1) is deleted in its
entirety and replaced by the following:
(a) For Non Rx Products. Cardinal will produce and transmit to Kmart on
a [***] basis a consolidated statement with invoice level detail on
tape for all Store purchases invoiced by Cardinal during the preceding
[***] days. For purchases invoiced Thursday through [***], Cardinal
will issue its statement on the following [***] and payment of such
statement must be received by Cardinal no later than noon (Dublin, Ohio
time) on the [***] following such [***] (such [***], the "Non Consigned
Merchandise Prompt Payment Date") in good funds transferred via ACH or
federal funds wire transfer to such bank account as Cardinal may from
time to time designate in writing to Kmart or other payment method
agreed to by the Parties. Should such [***] be a bank holiday, payment
must be so received by noon (Dublin, Ohio time) on the following [***].
(For example, for purchases [***],[***] through [***],[***], the
statement would be issued [***],[***], and payment must be received via
ACH or federal funds wire transfer or other payment method agreed to by
the Parties no later than noon (Dublin, Ohio time) on [***],[***]. If
[***],[***] is a bank holiday, the payment must be received via ACH or
federal funds wire transfer or other payment method agreed to by the
Parties no later than noon (Dublin, Ohio time) on [***],[***]).
(b) For Consigned Inventory. Payment by Kmart for Rx Products will be
made in good and usable funds on the [***] following the day on which
the prescription is sold by the Stores, based on the dispensing data
(PDX) received at Kmart's Headquarters from the Stores (such [***] 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 Consigned Merchandise Prompt
Payment Date contained in the Xxxxxxxx Xx. 0, Xxxxx paid Cardinal an
additional [***]. Both Parties acknowledge that Cardinal currently
holds $[***] which Cardinal will return to Kmart promptly upon
termination of this Agreement after all amounts outstanding have been
paid to Cardinal in full. The sale of Consigned Inventory will be based
on the dispensing data received at Kmart's Headquarters from the
Stores.
Kmart will not take any deductions from amounts due Cardinal,
unless authorized by Cardinal. Without limiting Cardinal's rights under
law or in equity, from and after the Effective Date, Cardinal and its
affiliates, parent or related entities, collectively or individually,
may exercise a right of set-off or recoupment against any and all
amounts due Kmart from and after the Effective Date. For purposes of
this section 8, Cardinal, its affiliates, parent or related entities
will be deemed to be a single creditor.
(c) Method of Payment; Financial Information. All payments for
Merchandise will be made by Kmart via ACH or federal funds wire
transfer or other method agreed to by the Parties so as to provide
Cardinal with good and usable funds on or before the applicable
4
due date. Cardinal retains the right to refuse orders and suspend
deliveries of all or any part of the orders placed under this Agreement
if Kmart fails to make any payment to Cardinal in accordance with the
provisions of this Agreement. The parties acknowledge that Cardinal is
not required to provide Kmart with notice or a right to cure pursuant
to section 20 prior to exercising the foregoing rights. Kmart will
provide Cardinal with financial information as reasonably requested by
Cardinal, including but not limited to [***].
5. Repackaged Drug Products.
(a) Section 9 is deleted in its entirety and replaced with the
following:
During the term of this Agreement, Cardinal will make
available to Kmart its full line of Repackaged Drug Products, and Kmart
will obtain from Cardinal (pursuant to the consignment provisions
contained herein and in the Purchase and Consignment Agreement) all
Repackaged Drug Products for the Stores as mutually selected by Kmart
and Cardinal. Kmart will participate in Cardinal's automatic
substitution program. Cardinal will pay a rebate on [***] as specified
in the section 9 Disclosure Schedule.
(b) The Section 9 Disclosure Schedule is deleted in its entirety and
replaced with the Section 9 Disclosure Schedule attached to this Second
Amendment.
6. Consigned Inventory Shrink and Inflation. Section 11 (as modified by the
Addendum No. 1) is deleted in its entirety and replaced with the following:
(a) Consigned Inventory Shrink. Damage or loss of Consigned Inventory
by casualty or shrinkage due to theft or other unexplained loss
(collectively, "Shrink") will be calculated as follows: Kmart will
conduct a physical inventory of each Store [***], including the
will-call bin, and upon closure of any Store. Within [***] days
following the Effective Date, Kmart and Cardinal will develop mutually
acceptable written procedures for managing Kmart's will-call bin
inventories. Kmart has developed, and will continue to follow, a
schedule for each month that identifies certain Stores that will be
subject to a physical inventory during such month, so that each Store
has conducted [***] physical inventory each [***]. Kmart acknowledges
that it has customarily conducted annual physical inventories at
approximately [***]% of its Stores, and Kmart will continue during the
Term of this Agreement to conduct [***] physical inventories at its
Stores in a manner and according to a schedule consistent with its
historical practice (the "Inventory Practice"). If Kmart does fails to
comply with its Inventory Practice during any [***], then (i) Cardinal
may conduct inventories consistent with the Inventory Practice, and
Kmart will provide Cardinal with access to the Stores that have not
been inventoried during the immediately preceding [***] for purposes of
conducting such inventories, and (ii) [***] will [***] for [***] to
conduct such inventories, and (iii) [***] will [***] for each [***]
during the [***] in which Kmart did not conform to its Inventory
Practice (which equals the estimated Shrink for [***] for [***] in
which Kmart fails to meet the Inventory Practice) within [***] of
Cardinal's request therefor, and such [***] will be included in the
applicable [***] reconciliation, described below. Within [***] of the
end of each [***], Kmart will provide the results of such physical
inventories to Cardinal. Kmart will use the results in its [***]
reconciliation of the ending Consigned Inventory for the Stores that
conducted their [***] inventory, as further described in this section.
If Consigned Inventory is damaged or lost due to
5
Shrink, then Kmart will treat such product as having been sold or
dispensed and the Parties will include the amount due to Cardinal for
such product in calculating any net underpayment or overpayment. If
reconciliation reflects a shortage or overage in the Consigned
Inventory (by comparing the result of the physical inventory to Kmart's
adjusted book value of the Consigned Inventory), then such amount will
be calculated and carried over to [***]. In addition to the foregoing,
Kmart will pay Cardinal for any other differences in the aggregate
between the Inventory Turns Schedule and Kmart's financial records. Any
net overpayments or underpayments determined to be owed based upon such
reconciliations (which is intended to include the Shrink resulting from
the annual physical inventories of Stores taken during the then-current
quarter) will be paid by/to the applicable Party within [***] following
the [***].
(b) Inflation. [***] is entitled to [***] all price inflation on the
Consigned Inventory. The value of inflation on the Consigned Inventory
will be the amount shown on each Inventory Turns Schedule.
The inflation calculation methodology used prior to
implementation of the Inventory Management System will continue to be
used in each Store unless and until such Store implements the Inventory
Management System. If a Store implements the Inventory Management
System, inflation will be calculated for such Store based upon [***]
for such Store by multiplying any change in price of any Rx Product by
[***]. The foregoing methodology for calculating inflation will become
effective for each Store on the first day of the month following the
implementation of the Inventory Management System. The amount of the
calculated daily changes for each month will be [***] for that month
and [***]. Cardinal will calculate and forward the results of the
calculation to Kmart by Store.
7. Generic Alliance. The Section 14 Disclosure Schedule is deleted in its
entirety and replaced by the Section 14 Disclosure Schedule attached to this
Second Amendment.
8. Returns of Merchantable and Unmerchantable Rx Products and Non Rx Products.
(a) The third paragraph of section 16(b) is deleted in its entirety and
replaced with the following:
All Rx Products (whether Unmerchantable or Merchantable)
delivered to the Designated Processor will be treated as having been
sold or dispensed by Kmart. The aggregate purchase price for all Rx
Products processed through the Designated Processor will be calculated
by [***] processed by the Designated Processor (the [***]), subject to
verification by both Parties. Each Party will adjust book inventory to
reflect the [***] as soon as it is verified by both Parties. [***].
Kmart will pay Cardinal an amount equal [***], in good and usable funds
on or before the [***] of each [***]. On a monthly basis, the parties
will reconcile the aggregate credit received from manufacturers against
the [***]. Each [***], the Parties will settle the cumulative
reconciliation as of [***], as follows: on the [***] day following each
[***], the Party owing the other Party as a result of the cumulative
[***] reconciliations as of [***] will pay the non-owing Party. Such
reconciliation will include all applicable credit memoranda and other
credits received, as well as all other deductions taken by Cardinal on
behalf of Kmart or reversed by the manufacturers. A final
reconciliation of the aggregate credit received from manufacturers
against the [***] will be performed and completed within [***] days
6
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 [***] 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 [***]. Cardinal 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.
(b) Section 16(c) (as modified by the Addendum No. 1) is deleted in its
entirety and replaced with the following:
Kmart has notified Cardinal of Kmart's choice of Designated
Processor, and will notify Cardinal of any change to Kmart's named
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, at
Kmart's expense. Cardinal will return to Kmart any Unmerchantable
Products forwarded to Cardinal from Kmart.
(c) The Section 16 Disclosure Schedule is modified as provided in the
Section 16 Disclosure Schedule attached to this Second Amendment.
9. Term.
(a) The first paragraph of Section 20 (as modified by the Addendum
No. 1) is deleted in its entirety and replaced with the following:
The term of the Agreement will extend for fifty-four (54)
months (the "Term") with the option to extend the term for successive
additional periods of [***] upon the mutual written consent of the
Parties. Promptly following the termination of this Agreement, Kmart
will return to Cardinal all order entry devices, and other hardware,
software or equipment provided by Cardinal and not purchased and paid
for by Kmart. Either Party may effect an early termination of this
Agreement for cause by giving written notice to the other Party of the
occurrence of a material breach of this Agreement (which notice shall
specify the nature of such breach) and the failure of the other Party
to cure or commence in good faith the cure of such breach within [***]
days of receipt of such notice (the "Cure Period"); provided, however,
in the event Cardinal is in breach and fails to cure such breach by the
[***] day of the Cure Period, Kmart shall provide a provisional notice
of termination for cause to Cardinal whereby Kmart may terminate this
Agreement [***] days after the date of the provisional notice unless
Cardinal cures its material breach by the expiration of the Cure
Period, in which case the provisional notice will be null and void. In
addition, Kmart may elect to terminate this Agreement immediately if
Cardinal (1) becomes insolvent or is unable to pay its debts as they
become due or admits in writing its inability to pay its debts as they
become due, (2) makes a general assignment for the benefit of its
creditors, (3) institutes or has instituted against it a proceeding
seeking a judgment of insolvency or bankruptcy or seeking any other
relief under any bankruptcy or insolvency law, (4) liquidates its
assets or winds-up its business (5) has a secured party or lien
creditor take possession of all or a material portion of its assets, or
(6) suffers a material adverse change in its financial condition.
Cardinal may elect to terminate this Agreement immediately if in
connection with the Kmart Chapter 11 case (the "Chapter 11 Case") which
is pending in the United States
7
Bankruptcy Court for the Northern District of Illinois, Eastern
Division (the "Bankruptcy Court"); (i) a chapter 11 trustee is
appointed; (ii) the Chapter 11 Case is dismissed or converted to a case
under chapter 7 of the Bankruptcy Code; (iii) the Bankruptcy Court
determines that Kmart's bankruptcy estate is administratively
insolvent; (iv) a chapter 11 liquidating plan is confirmed by the
Bankruptcy Court; or (v) upon issuance of a notice of acceleration
resulting from an Event of Default (as defined in the DIP Credit
Agreement, defined below) under the Revolving Credit and Guaranty
Agreement among Kmart, its subsidiaries, and certain banks and other
lenders dated as of January 22, 2002, as amended, modified or replaced
from time to time (the "DIP Credit Agreement"), by the Agent for the
lenders. After confirmation of a plan of reorganization in the Chapter
11 Case, Cardinal may elect to terminate this Agreement immediately if
any of the circumstances in (1) through (6) above occur with respect to
Kmart.
(b) The second paragraph of Section 20 is deleted in its entirety and
replaced with the following:
Notwithstanding the above, Kmart reserves the right, at any
time to effect an early termination of this Agreement without cause,
and without further liability to Cardinal except amounts owed under
this Agreement. Notwithstanding the above, Cardinal reserves the right,
at any time following confirmation and consummation of a plan of
reorganization in the Chapter 11 Case, to effect an early termination
of this Agreement without cause, and without further liability to Kmart
except amounts owed under this Agreement. In order to effect such an
early termination under this paragraph, a Party will be required to
give written notice to the other not less than [***] prior to the
effective date of the early termination.
(c) Notwithstanding anything herein to the contrary, including but not
limited to, section 18, if this Agreement terminates prior to the end of the
Term for any reason (other than Cardinal's early termination without cause),
Kmart will refund to Cardinal the Inventory Write-Down as further described on
the section 20 Disclosure Schedule.
10. Kmart Acquisition/Divestiture of Pharmacies. The following is added to
Section 23:
Cardinal will purchase the Rx Products owned by each Acquired
Pharmacy within [***] following the date on which Cardinal receives
notice and confirmation that the acquisition has been completed,
documentation from Kmart evidencing unencumbered title, and a physical
count report certified by Kmart, in form and content comparable to the
Purchase and Consignment Agreement and reasonably acceptable to
Cardinal. Kmart will not deduct the amount of the purchase price from
amounts otherwise due Cardinal unless Cardinal has not paid such amount
to Kmart as provided herein. Kmart will provide Cardinal with [***] of
the closing or sale of any Store, and will provide Cardinal with
information as requested by Cardinal regarding the disposition of the
Merchandise within such Store. Upon closure or sale of any Store, Kmart
will pay Cardinal, in accordance with the terms of this Agreement, for
all Merchandise (which expressly includes Consigned Inventory, which
will be treated as if it was dispensed) that is sold or otherwise
transferred to a third party unrelated to Kmart, and will notify
Cardinal of any transfers of Merchandise to other Stores in accordance
with section 4(c) of this Agreement.
8
11. Notices. Section 26 is amended to provide that notice to Cardinal will be
addressed to the following:
Cardinal
0000 Xxxxxxxx Xxxxx
Xxxxxx, Xxxx 00000
Attention: General Counsel
Facsimile Number: 000-000-0000
12. Confidentiality. Except as expressly provided in section 17 below, or, upon
prior notice to Cardinal, as necessary to obtain the Bankruptcy Court's approval
of this Agreement, including, but not limited to, sharing this Agreement with
the three, official committees appointed in the Chapter 11 Case, or as otherwise
may be required to be disclosed by order of the Bankruptcy Court in the Chapter
11 Case or by any other state or federal court in any proceeding involving the
Parties (or, if only one Party is a named party, the other Party has been given
reasonable notice of such proceeding), each Party shall maintain the
confidentiality of the terms and conditions hereof and any financial information
exchanged including, but not limited to, the financial information provided by
Kmart pursuant to Section 8(c), throughout the term of this Agreement and for a
period of two (2) years thereafter.
13. Acknowledgement of Security Interest in Rx Products and Proceeds;
Miscellaneous. This Second Amendment does not constitute a renewal, refinance,
consolidation, novation, satisfaction, release, or extinguishment of any
obligations existing under the Purchase and Consignment Agreement between the
Parties dated as of August 1, 1996 (the "Purchase and Consignment Agreement") or
the Original Agreement, and Kmart hereby acknowledges and agrees that nothing
herein is intended to amend or alter in any way, Cardinal's consignment and
security interest in and to the Consigned Inventory and any proceeds therefrom
(including, but not limited to, accounts receivable generated from the
dispensing or sale of Consigned Inventory) that are the subject of this
Agreement and the Purchase and Consignment Agreement, which will remain in full
force and effect as security for all obligations of Kmart under this Agreement
and the Purchase and Consignment Agreement other than the purchase price for
Non-Rx Products. All capitalized terms contained in this Second Amendment but
not defined herein will have the same meaning as that set forth in the Original
Agreement or in the Purchase and Consignment Agreement, as the case may be.
Except to the extent otherwise set forth in this Second Amendment, the terms,
conditions and provisions of the Original Agreement are unchanged and remain in
full force and effect.
14. Reconciliation of Outstanding Amounts; Inventory Reconciliation. On the
first business day following the Effective Date of this Second Amendment, Kmart
shall pay to Cardinal $16,975,663 (the "Outstanding Amount") in satisfaction of
certain outstanding obligations (the "Reconciled Items") under this Agreement as
of August 31, 2002 (the "Reconciliation Date"), as set forth on a certain
schedule dated October 9, 2002. In addition, Kmart hereby acknowledges that the
value of all Consigned Inventory in the possession and control of Kmart as of
end of contract year 6, July 31, 2002, according to Cardinal's books and records
was $[***] (the "CY 6 Inventory Value"), and to the extent that Kmart cannot
reconcile its books and records to the CY 6 Inventory Value on or before the
Effective Date, Kmart shall pay the shortfall to Cardinal on the first business
day following the Effective Date (the "Inventory Shortfall"). Cardinal and Kmart
shall, in good faith, endeavor, and cooperate with each other, to reconcile the
Inventory Shortfall prior to January 31, 2003. To the extent that the Inventory
Shortfall is reduced as a result of that reconciliation, Cardinal will refund to
Kmart the reduction in the Inventory
9
Shortfall, plus interest at [***]% per annum, on January 31, 2003. To the extent
that the Inventory Shortfall increases as a result of that reconciliation, Kmart
shall pay such additional amount to Cardinal on January 31, 2003. Kmart also
hereby acknowledges and agrees that Cardinal has an Allowed Reclamation Claim
(as defined in the Kmart's Motion filed in the Chapter 11 Case dated January 28,
2002) in the amount of $2,786,710.40.
Upon payment of the Outstanding Amount and the Inventory Shortfall, if any,
Kmart and Cardinal shall each release and forever discharge the other, and their
directors, officers, employees, agents and successors and assigns from any and
all claims, causes of action, liabilities, or damages of any kind related to the
Reconciled Items that arose under the Original Agreement in whole or in part on
or prior to the Reconciliation Date, except for only (i) inventory shrink
occurring or reported since July 31, 2002, which shall be paid in the ordinary
course pursuant to Section 11 of the Agreement, (ii) the Allowed Reclamation
Claim, which shall be satisfied by Kmart by payment of 75% of the claim no later
than November 30, 2002, (iii) the $[***] deposit of Kmart held by Cardinal,
which shall be returned to Kmart upon termination of this Agreement and payment
of all amounts due Cardinal under this Agreement; (iv) adjustments resulting
from the reconciliation of the Inventory Shortfall, as provided in the previous
paragraph, which shall be finalized on January 31, 2003; and (v) any unpaid
amounts owed to Kmart as a result of the integration of Bindley Western
Industries, Inc.'s generic drug purchasing program into Cardinal's.
15. Effective Date of Second Amendment. The terms of this Second Amendment will
be effective upon entry of an Order by the Bankruptcy Court presiding over the
Kmart Chapter 11 Case authorizing Kmart's assumption of this Agreement and the
Purchase and Consignment Agreement and further providing that such agreements
will not be assignable by Kmart without the written consent of Cardinal (the
"Effective Date").
16. Remedies Upon Default or Termination; Relief from Automatic Stay. Upon the
occurrence of (a) any payment default by Kmart under this Agreement or the
Purchase and Consignment Agreement, (b) any non-payment default by Kmart under
this Agreement or the Purchase and Consignment Agreement which is not cured
within any applicable grace period, or (c) any termination of this Agreement by
either Party, Cardinal shall be entitled to seek relief from the Bankruptcy
Court for the purpose of enforcing its rights under this Agreement and the
Purchase and Consignment Agreement, and Kmart agrees not to assert the Automatic
Stay under 11 U.S.C. Section 362 as a basis for (1) preventing Cardinal from
seeking relief from the Bankruptcy Court for the purpose of enforcing its rights
under this Agreement and the Purchase and Consignment Agreement or (2)
preventing Cardinal from exercising any and all remedies available to Cardinal
under this Agreement, the Purchase and Consignment Agreement or applicable law.
17. Announcements. Except for disclosures required pursuant to applicable
bankruptcy law or by order of the Bankruptcy Court presiding over the Chapter 11
Case or by any other state or federal court in any proceeding involving the
Parties (or, if only one Party is a named party, the other Party has been given
reasonable notice of such proceeding), neither party shall issue any press
release or other public announcement, verbally or in writing, referring to the
other party or any entity that controls, is controlled by or under common
control with such party. Nothing herein shall limit the right of either party to
issue a press release or public announcement if, in the opinion of such party's
counsel, such press release or public announcement is required pursuant to state
or federal securities laws, rules or regulations, or other applicable laws, in
which case the party required to make the press release or public announcement
shall use its
10
commercially reasonable efforts to obtain the approval of the other party as to
the form, nature and extent of the press release or public announcement prior to
issuing the press release or making the public announcement.
11
Kmart Corporation Cardinal*
By: __________________________ By: _________________________
Print Name: ___________________ Print Name: __________________
Title: _________________________ Title: ________________________
*The term "Cardinal" shall include the following affiliated companies: XxxXxx,
Inc.; Cardinal Distribution, L.P., Xxxxx X. Xxxx, Inc.; Xxxxxxxx Distribution
Corporation; Cardinal Southeast, Inc.; Bindley Western Industries, Inc.; Bindley
Western Industries II of Maine, Inc. and any other subsidiary of Cardinal
Health, Inc., an Ohio corporation ("CHI"), as may be designated by CHI.
12
SECTION 1 DISCLOSURE SCHEDULE
SERVICE LEVEL
Cardinal will exercise all reasonable efforts to provide Kmart with a
Service Level on all Rx Products of [***]. The Service Level will be calculated
[***] as follows: Cardinal will divide the total lines of Rx Products shipped to
all of the Stores serviced by a Cardinal distribution center by the number of
lines of Rx Products ordered by all such Stores. The following items shall be
excluded from the Service Level calculation:
1. Manufacturer back orders/temporary outs;
2. Items moving from non-stock to regularly stocked status, for a period of
thirty days following such reclassification, and discontinued items;
3. Items moving from regularly stocked status to non-stocked status due to
non-movement over a [***] day period, and items discontinued by the
manufacturer;
4. Rx Products shipped within two (2) working days of initial order (including
those filled by an affiliate of Cardinal), which will instead be counted as
a line filled;
5. Items where Cardinal can demonstrate that a Store has failed to provide
accurate usage figures for a given month;
6. Items where Kmart's historical demand over the preceding [***] is exceeded
by [***]%;
7. Shorted items ordered more than once within [***] days; and
8. Orders that were placed but not actually received by Cardinal due to
electronic data interruption or failure beyond the reasonable control of
Cardinal. Cardinal will keep and maintain a record of all electronic data
interruptions that prevented the receipt of orders and will provide such
information to Kmart to verify any service level problem Cardinal claims is
related to the failure to receive orders.
Non-stock is defined as less than [***] shipping units ordered per [***] per
Cardinal distribution facility by any Cardinal distribution facility servicing a
Store. Merchandise that is delivered with unacceptable dating and returned for
full credit within [***] days, will not count as a line filled.
Cardinal reserves the right to utilize alternative divisions as
inventory backups for out-of-stock Rx Products in the primary ordering location.
Cardinal may, in its discretion, contract with a secondary supplier to
ship product to the Stores at no additional cost to Kmart. Cardinal will pay the
secondary supplier for such product and Kmart will pay Cardinal an amount equal
to the Cost of Goods as provided in this Agreement for such product when
dispensed.
Failure by a Cardinal distribution center to maintain an aggregate
Service Level each [***] calculated in accordance with this section 1 Disclosure
Schedule will entitle Kmart to a credit memo in an amount equal to [***] of the
difference in dollar value between an aggregate Service Level of [***] and the
actual aggregate Service Level [***] during such month. For example, if Kmart's
purchases (net of credits, returns, late charges or other similar items) from
[***] during [***] were [***], and the aggregate service level was [***], then
the service credit would be $[***], calculated as follows: [***]. In addition to
the foregoing service level credit, Kmart may provide Cardinal with a notice of
material breach pursuant to section 20 for Cardinal's failure to meet its
Service Level commitment. In such case, Cardinal may cure such breach by
achieving a monthly Service Level of [***] during the Cure Period.
13
SECTION 5 DISCLOSURE SCHEDULE
Consigned Inventory Turns Schedule Example:
14
SECTION 7 DISCLOSURE SCHEDULE
Cost of Goods:
(a) Cost of Goods. The Stores may purchase branded Rx Products and
Repackaged Drug Products from Cardinal in an amount equal to CARDINAL'S COST
[***]%. Kmart's purchase price for other Merchandise is as follows:
---------------------------------------------------------------------------
MERCHANDISE PURCHASED (EXCLUSIVE OF
SPECIALLY PRICED MERCHANDISE) COST PLUS/MINUS PERCENTAGE
---------------------------------------------------------------------------
[***] Vials Current [***] minus [***]*
---------------------------------------------------------------------------
[***] Cost [***]
---------------------------------------------------------------------------
[***] Cost [***]
---------------------------------------------------------------------------
*Because Cardinal does not control [***] pricing, if [***] compresses
the price spread, then Cardinal will be entitled to reduce the discount on the
[***] product line by the corresponding change from [***]. Cardinal will
demonstrate in writing to Kmart that [***] compressed the price spread. For
example, if [***] reduces its discount to Cardinal by [***], then Cardinal will
reduce its discount to Kmart to [***]. If Kmart elects to purchase vials from
any manufacturer other than [***], then Cardinal reserves the right to modify
the discount percentage.
The Parties acknowledge and agree that neither Party wishes for the
pricing for branded Rx Products and Repackaged Drug Products to be disclosed or
discovered by either Party's competitors. Due to the confidential nature of the
pricing hereunder, the Cost of Goods will not be included in each Store's
invoices for branded Rx Products and Repackaged Drug Products. Cardinal will
provide Kmart's headquarters with a daily electronic pricing file that reflects
a Cost of Goods equal to Cardinal's Cost [***]% on branded Rx Products and
Repackaged Drug Products. Kmart will pay Cardinal the amount shown on the
electronic pricing file. Kmart will provide the Stores, third party payors and
any governmental agency, including but not limited to all Medicaid agencies, the
FDA and the DEA, with accurate and complete information that reflects the actual
pricing described in this Section 7 Disclosure Schedule as required, and will
hold Cardinal harmless for Kmart's failure to do so. Nothing herein will be
construed to prohibit either Party from disclosing the Cost of Goods as required
by law.
Kmart agrees that the Cost of Goods is materially affected by the total
number of Stores (with Consigned Inventory) and the average volume of net
purchases per Store (with Consigned Inventory). Therefore, if Kmart operates
[***] Stores (with Consigned Inventory), then the Cost of Goods will be adjusted
prospectively as follows:
---------------------------------------------------------------------------------
NUMBER OF STORES WITH CONSIGNED INVENTORY COST OF GOODS
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
[***] [***]%
---------------------------------------------------------------------------------
15
If Kmart operates [***] Stores or less, or Kmart's average annual total
purchase volume per Store under this Agreement is $[***] or less, Cardinal may
modify the Cost of Goods as it deems reasonably necessary. Notwithstanding
anything in this Agreement to the contrary, in no event may Kmart purchase less
than all of its requirements of Rx Products from Cardinal, as specified in
section 1.
(b) Volume [***] Rebate. As long as Kmart has no past due amounts
outstanding under this Agreement (which are not in good faith disputed by
Kmart), Kmart will be eligible for the following [***] rebate based upon the
[***] from Cardinal during the previous [***] (the "VOLUME [***] REBATE"):
-------------------------------------------------------------
[***] VOLUME [***] REBATE
-------------------------------------------------------------
[***] [***]%
-------------------------------------------------------------
[***] [***]%
-------------------------------------------------------------
[***] [***]%
-------------------------------------------------------------
[***] [***]%
-------------------------------------------------------------
[***] [***]%
-------------------------------------------------------------
Cardinal will calculate Kmart's total net purchases each [***]
(excluding those purchases by the Stores located in Puerto Rico), and divide
such amount by [***] (excluding those Stores located in Puerto Rico). [***] will
be determined by adding the number of [***]. The Volume [***] Rebate will be
applied to Kmart's aggregate net purchases during the previous Contract Quarter,
and will be paid [***]. For example, [***].
The Volume [***] Rebate is a discount or other reduction in price" as
such term is used under section 1128(B)(3)(A) of the Social Security Act, 42
U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose the Volume [***] Rebate and any
other "discounts or other reductions in price" received by Kmart from Cardinal
under any state or federal program which provides cost or charge-based
reimbursement to Kmart for the Merchandise purchased by Kmart from Cardinal or
as otherwise requested by a government agency.
(c) OTC Rebate.
As long Kmart has no past due amounts outstanding under this Agreement
(which are not in good faith disputed by Kmart), each [***], Cardinal will pay
Kmart a volume rebate of [***]% of Kmart's net purchases of certain eligible
Non-Rx Products (which will be calculated at [***], [***]) manufactured
[***],[***], and [***] (the "OTC Rebate"). Cardinal will pay the OTC Rebate
within [***] following the [***]. The OTC Rebate is a discount or other
reduction in price" as such term is used under section 1128(B)(3)(A) of the
Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose this OTC
Rebate and any other "discounts or other reductions in price" received by Kmart
from Cardinal under any state or federal program which provides cost or
charge-based reimbursement to Kmart for the Merchandise purchased by Kmart from
Cardinal or as otherwise requested by a government agency. Any change in a
manufacturer's rebate policy to Cardinal will result in a corresponding change
of the OTC Rebate to Kmart.
16
(d) Volume Discount. Cardinal agrees to provide Kmart with a payment
equal to $[***] multiplied by a fraction the numerator of which will equal
Kmart's purchases of [***] from the Effective Date through the end of the Term,
and the denominator of which will equal $[***] (the "Volume Discount"). The
Volume Discount will be paid within [***] following [***], to be applied first
to amounts owed Cardinal, with any remaining balance to be paid to Kmart. No
Volume Discount will be paid if this Agreement terminates prior to [***];
however, in the event that Cardinal terminates without cause, Kmart will be
entitled to the Volume Discount as calculated above, within thirty (30) days
following [***]. The Volume Discount is a "discount or other reduction in price"
as such term is used under section 1128(B)(3)(A) of the Social Security Act, 42
U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose the Volume Discount and any other
"discounts or other reductions in price" received by Kmart from Cardinal under
any state or federal program which provides cost or charge-based reimbursement
to Kmart for the Merchandise purchased by Kmart from Cardinal or as otherwise
requested by a government agency.
17
SECTION 9 DISCLOSURE SCHEDULE
[***] Rebate
As long as Kmart has no past due amounts outstanding under this
Agreement (which are not in good faith disputed by Kmart), Cardinal will pay to
Kmart on a [***] basis a rebate of [***]% of Kmart's net purchases of [***] (the
[***] Volume Rebate"). The [***] Volume Rebate will be paid within [***] days
following the end of [***]. The [***] volume will be adjusted on a pro rata
basis for [***] by Cardinal.
The [***] Volume Rebate is a "discount or other reduction in price" as
such term is used under section 1128(B)(3)(A) of the Social Security Act, 42
U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose the [***] Volume Rebate and any
other "discounts or other reductions in price" received by Kmart from Cardinal
under any state or federal program which provides cost or charge-based
reimbursement to Kmart for the Merchandise purchased by Kmart from Cardinal or
as otherwise requested by a government agency.
18
SECTION 14 DISCLOSURE SCHEDULE
Upon the Effective Date, Kmart will participate in the Cardinal Generic Alliance
on the following terms:
SAVINGS:
Kmart and Cardinal will [***] associated with volume discount or profit-sharing
incentives resulting directly from Kmart purchases under the Generic Alliance
[***]). Such volume discounts and profit-sharing incentives are "discounts or
other reductions in price" as such term is used under section 1128(B)(3)(A) of
the Social Security Act, 42 U.S.C. 1320a-7b(b)(3)(a). Kmart will disclose the
volume discounts and profit-sharing incentives and any other "discounts or other
reductions in price" received by Kmart from Cardinal under any state or federal
program which provides cost or charge-based reimbursement to Kmart for the
Merchandise purchased by Kmart from Cardinal or as otherwise requested by a
government agency.
A LINE:
The Parties have established an "A Line" item list ("A Line") of
generic Merchandise which will be purchased by Kmart through the Generic
Alliance. The A Line may be amended from time to time by Cardinal, in its
reasonable discretion. In the event that any item on the A Line is not available
for shipping when ordered by a Store, Cardinal will automatically substitute a
generically equivalent item for the item ordered. Kmart will be billed the price
of the A Line for the item substituted. Within [***] days following the end of
each [***], Cardinal will calculate (a) the total number of sell units (such as
a single bottle, a single box, a unit dose) of Merchandise on the A Line that
Kmart ordered from Cardinal during such [***] multiplied by [***]%; and (b) the
total number of sell units of Merchandise on the A Line that Kmart purchased
from Cardinal during such [***] that were automatically substituted by Cardinal
because the item on the A Line was not available for shipping when ordered by a
Store (excluding Manual Overrides). [***]:
[***]
Cardinal will provide a report to Kmart on a quarterly basis indicating
the autosubstitution rate during such quarter.
In the event that a Store manually overrides the A Line automatic
substitution process resulting in a more expensive item being dispensed ("Manual
Overrides"), then Kmart will pay to Cardinal the [***]. Cardinal will provide
Kmart with a report specifying the amount due each month. Kmart will have the
right to audit such report within [***] days of receipt from Cardinal. Kmart
will pay Cardinal [***] of receipt by Kmart from Cardinal of such report.
GENERAL TERMS:
Kmart and Cardinal will use the identity of Kmart, its participation in
the Generic Alliance, and other information regarding Kmart ("Generic Purchasing
Data") to jointly negotiate discounts for the Generic Alliance from suppliers on
the purchase of generic Merchandise.
19
As of the Effective Date (a) Kmart will [***], and (b) Kmart agrees to
[***]. Both Parties acknowledge and agree that these commitments are integral
elements of this Agreement. On and after the Effective Date, the Generic
Alliance will be in a primary position with autosubstitution with respect to all
of the Stores' purchases of generic Merchandise. Further, Kmart will immediately
terminate all Manufacturer Contracts for generic Merchandise. With respect to
inventory that Cardinal purchased to accommodate Kmart's previous purchases of
generic Rx Products pursuant to direct contracts between Kmart and various
manufacturers, Cardinal, in its sole discretion, will manage the transition from
such contracts back to items on the Generic Alliance, and in no event will
Cardinal pay, or be required to pay Kmart any amounts in connection with such
transition, including but not limited to the [***].
For the purpose of Cardinal supplying Generic Alliance suppliers with
data regarding purchases of generic Merchandise from Cardinal, all Kmart Stores
will be loaded into a separate Generic Alliance contract. Such contract will
contain exclusively Kmart data. Such contract numbers and data will be disclosed
to Kmart upon reasonable request.
[***], Kmart may attempt to negotiate with generic suppliers to improve
the contract cost for an item of generic Merchandise on the Generic Alliance for
all Generic Alliance members. [***]. Any information that is not communicated to
Cardinal in writing will not be considered by Cardinal in making its
determination whether to amend the A Line, as further described below. [***].
Notwithstanding anything herein to the contrary, in no event may Kmart purchase
any generic Merchandise outside of the Generic Alliance or through any source
other than Cardinal.
[***] the Parties acknowledge that Cardinal selects the suppliers
participating in the Generic Alliance formulary on behalf of the Generic
Alliance members. Notification of awards will be made in conjunction with Kmart
and the other Generic Alliance members, as appropriate.
In the discussions between Cardinal and Kmart regarding the Generic
Alliance, representatives of the Parties will disclose to the other, either
orally or in writing, certain proprietary information that will be helpful in
evaluating such business opportunity. As used herein, the term "Confidential
Generic Information" includes all such proprietary information furnished by the
Parties or any of their respective representatives to the other Party or its
representatives. Confidential Generic Information includes, but is not limited
to, the type of information provided in the Generic Purchasing Data and any
analyses, compilations, studies and other materials prepared by either Party
which contain or are based in whole or in part on any proprietary information.
Confidential Generic Information does not include, however, information which:
(a) is or becomes generally available to the public other than as a result of
disclosure by the other Party or its representatives; or (b) at the time of
disclosure to one Party by the other was already known by the former; or (c)
becomes available to the other Party on a nonconfidential basis from a source
that is entitled to disclose it on a nonconfidential basis.
The Parties agree that any Confidential Generic Information either
Party receives will be used solely for the purpose of establishing and
administering the Generic Alliance. The Parties also agree that during
Cardinal's and Kmart's joint discussions with suppliers concerning the purchase
of generic Merchandise, Cardinal and Kmart may disclose to such suppliers some
or all of the Generic Purchasing Data, as well as the identity of the other
parties participating in the Generic Alliance. Except for such disclosure to
suppliers or disclosure required by law, the Parties each agree to not disclose
any Confidential Generic Information concerning the other to any third party
without the consent of the other; provided, however, that prior to making any
20
legally required disclosure, the Party proposing to make the disclosure will
give the other Party as much prior notice of the requirement for and contents of
such disclosure as is practicable under the circumstances. Confidential Generic
Information may be disclosed by the Parties to their respective representatives
who need to receive it for purposes of evaluating the Generic Alliance and who
are advised of the contents of this Agreement. Cardinal agrees that it will not
disclose Kmart's Confidential Generic Information to any of Cardinal's other
customers or prospective customers, except in an aggregate format that does not
identify information as relating to individual customers.
[***] GUARANTEE:
Cardinal agrees that at no time during the term of this Agreement, will
the [***]. Not more than twice in any Contract Year, and following 30 days
advance written notice to Cardinal, Kmart may audit Cardinal's records relating
to [***] to verify Cardinal's compliance with this paragraph, provided that
Kmart may only review such records through an employee of an independent
certified public accounting firm (that is not engaged by Cardinal or Kmart).
Such employee will execute a confidentiality agreement prior to beginning the
review. Such accounting firm may confirm to Kmart that Cardinal has (or has not)
complied with this paragraph, but may not (and will not) disclose to Kmart any
information reviewed in connection with the audit. If such accounting firm
determines that Cardinal has not complied with this paragraph, [***]. The
Parties will equally share the accounting firm's fee for such audit. Section 22
is not applicable to this [***] section.
The [***] will be equal to the following: The difference between [***]
during the 12 months immediately preceding the Effective Date and [***] during
the applicable Contract Year, multiplied by [***] through the Generic Alliance.
For example, if [***] as of the Effective Date is [***]%, and during the first
Contract Year, [***] was [***]% due to [***], and [***] million, then [***]
would pay [***] $[***] [***]% times $[***] million).
Any excess will be paid within 45 days following the end of each
Contract Year. Kmart's sole and exclusive remedy for Cardinal's failure to
comply with this paragraph is [***].
21
SECTION 16 DISCLOSURE SCHEDULE
The Non-Consigned and Consigned Inventory Return Goods Policies are
amended to provide that the Normal Credit Amounts will be based upon the
original amount paid by Buyer.
The Parties further acknowledge that if Merchandise was [***] (as
defined in the Non-Consigned and Consigned Inventory Return Goods Policies),
[***] is entitled to [***] from the applicable invoice date. This process is
[***] exclusive remedy for [***] to ship product [***].
ONE-TIME CLEAN UP
The following is added to the Consigned Inventory Return Goods Policy in
accordance with the following conditions:
1. Schedule II drugs are excluded.
2. Repackaged Merchandise can be returned as long as it has a minimum of [***]
months of dating remaining.
3. Merchandise must be returned to the respective Cardinal distribution center
from which it was purchased.
4. Returns may not exceed [***]% of the prior twelve (12) month's Qualified
Purchases.
5. The return will be conducted during a [***] business day period within [***]
days following the Effective Date, Kmart may return Consigned Inventory in
merchantable condition to Cardinal for a [***]% restocking fee.
22
SECTION 20 DISCLOSURE SCHEDULE
The parties acknowledge and agree that as a result of the reduced Cost of Goods
pursuant to this Second Amendment, the value of the Consigned Inventory to which
a Cost of Goods of [***]% applies will be reduced by [***]% (the difference
between the Cost of Goods as of the Effective Date (Cardinal's Cost [***]%) and
the Cost of Goods prior to the Effective Date (Cardinal's Cost [***]%))
multiplied by the inventory balance of such Consigned Inventory on the first
Wednesday following the Effective Date (the "Inventory Write-Down"). Cardinal
will calculate and notify Kmart of the Inventory Write-Down by the end of the
first full month following the Effective Date, and will provide Kmart with a
good faith estimate of the Inventory Write-Down on or before execution of this
Second Amendment.
If this Agreement terminates for any reason prior to [***] from the Effective
Date, other than because of Cardinal's termination of this Agreement without
cause, Kmart will pay to Cardinal within thirty (30) days of termination the
[***] proportion to the [***] until [***] from the Effective Date. For example,
if the first Contract Year begins on [***] and this Agreement terminates on
[***], and the Inventory Write-Down was $[***] million, Kmart would repay
Cardinal $[***] ([***] remaining X $[***] ($[***] million divided by [***]) per
month = $[***]). In addition, partial months will be prorated appropriately.
Kmart agrees and acknowledges that the foregoing payment has been negotiated in
good faith and is not intended to be a penalty. Further, Kmart acknowledges and
agrees that Cardinal has entered into this Second Amendment based upon the
presumption that the Inventory Write-Down will be [***] beginning on the
Effective Date. This payment will be made to Cardinal on or before termination
of this Agreement.
Upon termination or expiration of this Agreement, Kmart will purchase from
Cardinal all Merchandise that Cardinal stocks specifically for Kmart including
but not limited to private label Non-Rx Product, customized pharmacy stickers
and bags, and Kmart labeled prescription bottle and vial caps.
23
