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10.03
PHARMACEUTICAL
SERVICES AGREEMENT
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This agreement is made as of August 1, 1996, between Kmart Corporation,
whose principal address is 3100 West Big Beaver Road, Troy, Michigan 48084
(hereinafter, "Kmart") and Cardinal Health* (consisting of those corporate
entities defined as such on the signature page), whose principal business
address is 5555 Glendon Court, Dublin, Ohio 43016 (collectively, "Cardinal
Health").
BACKGROUND INFORMATION
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A. Kmart is engaged in the business of selling consumer products,
including prescription pharmaceutical products, at retail locations located
throughout the United States.
B. Cardinal Health is a distributor of pharmaceutical and related
health care products to chain and independent drug stores, hospitals, alternate
care centers, and other customers located throughout the United States.
C. On January 28, 1994, Kmart and Whitmire Distribution Corporation (a
corporation which was subsequently acquired by Cardinal Health on February 7,
1994) entered into a Merchandise Agreement (the "Current Agreement") pursuant to
which Cardinal Health serves as the primary wholesale supplier of pharmaceutical
and related products to most of Kmart's stores.
D. Kmart and Cardinal Health now desire to expand the primary wholesale
supply relationship to all of Kmart's stores, including those stores hereafter
acquired or opened during the term of this Agreement (the "Stores"), and
establish certain advertising, inventory management, repackaging, and joint
marketing initiatives with respect to Kmart's pharmacy operations. A complete
listing of the existing Kmart Stores is included in the Item D Disclosure
Schedule.
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:
Section 1. SUPPLY OF MERCHANDISE. Upon the terms and conditions
described in this Agreement, Kmart will: (a) obtain from Cardinal Health
pursuant to the consignment provisions contained herein and in the Purchase and
Consignment Agreement (as defined below), all prescription pharmaceutical
products ("Rx Products"), including all Rx Products purchased from the
manufacturer in bulk or larger quantity containers and repackaged for the Stores
into smaller quantity containers (the "Repackaged Drug
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Products") for sale to customers of the Stores; and (b) at Kmart's option,
purchase from Cardinal Health certain non-prescription products ("Non Rx
Products") routinely stocked by Cardinal Health and ordered from time-to-time
by the Stores, including vials, syringes, insulin, and other over-the-counter
merchandise and supplies.
Cardinal Health will exercise all reasonable efforts to provide each
Kmart Store with the following average monthly Service Level per Store,
calculated in accordance with the standards and procedures described in the
Section 1 Disclosure Schedule: (a) (i) 96% or better for all Rx Products prior
to implementation of an automated replenishment inventory system and (ii) 98% or
better for all Rx Products after implementation of an automated replenishment
inventory system, and (b) 99% or better for the 200 Rx Product SKU's set forth
in the Section 1 Disclosure Schedule, both before and after implementation of an
automated replenishment inventory system. The Service Level guaranty will become
effective for any new Store 60 days after the opening of such new Store. If the
average Cardinal Health Service Level for any Store should fall below the levels
set forth above for any 30 calendar day period (despite the reasonable efforts
of Cardinal Health), then Kmart will be entitled to payment from Cardinal Health
of an amount equal to 0.1% multiplied by the total Rx Products dispensed and
paid for by that Kmart Store during the 30 calendar days in which the Service
Level was below the specified level. Payment will be made within 10 business
days after the end of the effected 30 day period and will constitute Kmart's
sole remedy for such failure to meet the Service Level guaranty for that Store.
Cardinal Health will provide Kmart with a Service Level report at the end of
each month by distribution center (each report to provide a statement of service
on a Store-by-Store basis) and upon reasonable demand of Kmart up to 12
company-wide Service Level reports per contract year.
Section 2. ADVERTISING INITIATIVES.
(a) INITIAL ADVERTISING PROGRAM FUNDS. Cardinal Health will
deliver payment to Kmart in the dollar amount ("Initial Advertising Program
Funds") set forth in the Section 2 Disclosure Schedule within 5 days of the
execution of this Agreement. The Initial Advertising Program Funds will be used
by Kmart for implementation of an advertising campaign to promote Kmart's
pharmacy program. If this Agreement is terminated prior to the fifth anniversary
of the Commencement Date other than termination by Kmart for cause pursuant to
the procedures outlined in Section 20, then Kmart will promptly refund to
Cardinal Health a portion of the Initial Advertising Program Funds on the terms
and subject to the conditions described in the Section 2 Disclosure Schedule.
(b) SUPPLEMENTAL ADVERTISING SUPPORT. Cardinal Health will
also contribute supplemental advertising support (the "Supplemental Advertising
Support") for ongoing development of the Kmart pharmacy program. The
Supplemental Advertising Support will be paid in such amounts and subject to the
conditions and parameters described in the Section 2 Disclosure Schedule based
upon incremental increases in the Store's purchase volume in selected markets
above certain benchmarks.
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Section 3. CONSIGNMENT. Effective as of August 1, 1996 (the
"Consignment Effective Date"), Cardinal Health will purchase from Kmart the Rx
Products (whether or not previously purchased from Cardinal Health) then held by
Kmart as inventory at the Stores (except those Stores located in Puerto Rico),
as well as the Repackaged Drug Product repackaged by Prestige Packaging, Inc.
for Kmart and located at certain of Cardinal Health's distribution centers, on
the Consignment Effective Date on the terms and subject to the conditions
described in the purchase and consignment agreement between the Parties having
the same date as this Agreement (the "Purchase and Consignment Agreement").
The purchase price (the "Purchase Price") for the sale and assignment
of such purchased inventory (the "Consignment Date Rx Inventory") will be an
amount equal to the Agreed Value (as defined below) of the Stores' total
merchantable inventory of Rx Products on the Consignment Effective Date,
exclusive of any Rx Products with an expiration date prior to the Consignment
Effective Date. The amount of any accounts receivable (excluding those subject
to reasonable disputes) associated with Rx Products or Non Rx Products based on
a reconciliation agreed to by the Parties from Kmart to Cardinal Health on the
Consignment Effective Date will be credited against the Purchase Price and
reduce the amount actually paid by Cardinal Health to Kmart. The "Agreed Value"
of the Consignment Date Rx Inventory will mean the total value thereof
determined by a physical count of the Consignment Date Rx Inventory, with each
unit of inventory being valued based upon the manufacturer's published wholesale
acquisition cost or the Kmart contract cost, as applicable, for such unit as of
July 15, 1996 from Cardinal Health, except inventory in those 250 Stores (the
"Sample Stores") having Telxon devices with NDC level of inventory capabilities
which will be valued based upon the manufacturer's published wholesale
acquisition cost or the Kmart contract cost, as applicable, for such unit as of
July 31, 1996 (or such other amount applicable to any Specially Priced
Merchandise as defined in Section 7 below). The physical count of the
Consignment Date Rx Inventory will be conducted by Kmart or its representatives,
with the assistance and participation of Cardinal Health. The Purchase Price
(less applicable credits as detailed above) will be paid by wire transfer from
Cardinal Health to Kmart (pursuant to written wire instructions to be delivered
to Cardinal Health by Kmart) no later than the later of: (a) 5 business days
following completion of the physical inventory, or (b) the date on which all
conditions to Cardinal Health's obligations under the Purchase and Consignment
Agreement have been satisfied or waived by Cardinal Health.
Section 4. TITLE TO CONSIGNED INVENTORY. Prior to and after delivery of
consigned inventory to the Kmart Stores under the terms of this Agreement
(including Rx Product inventory sold by Kmart to Cardinal Health on the
Consignment Effective Date), title to such consigned inventory will be held by
RedKey, Inc. until such time as such inventory is dispensed by Kmart and RedKey,
Inc. will be the owner of all such consigned inventory until such time as such
inventory is dispensed by Kmart.
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Section 5. DELIVERY/ORDER SUBMISSION PROCEDURES.
(a) PRIOR TO CONSIGNMENT EFFECTIVE DATE. Prior to the
Consignment Effective Date, each of the Stores will develop and place orders for
Rx Products (including Repackaged Drug Products) and, if applicable, Non Rx
Products (collectively, "Merchandise") directly with the applicable servicing
facility of Cardinal Health. Orders transmitted to Cardinal Health no later than
8:00 p.m. will be delivered no later than 12:00 noon the next business day,
Monday thru Friday, or as otherwise established by mutual agreement in writing
of the Kmart Pharmacy District Managers and the applicable servicing facility;
provided, however, unless otherwise agreed in writing, Cardinal Health shall not
require a Store to place orders prior to 7:00 p.m. to receive deliveries by
12:00 noon the next business day. All orders will be electronically transmitted
via Telxon or other electronic order entry system reasonably acceptable to
Cardinal Health.
(b) 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 11 inventory "turns" determined in accordance with generally
accepted accounting principles (the "Inventory Turns Target") during each of
the first three contract years of this Agreement. For purpose of this
Agreement, inventory turns will be calculated on an aggregate basis each
contract year based upon the average daily consigned inventory during such
year, compared against sales of consigned inventory during the same period. If
for any of the first three contract years, the actual inventory turns achieved
is less than the Inventory Turns Target, then Kmart will pay Cardinal Health a
service charge of 10% on such excess inventory within 5 business days of
Cardinal Health's invoice for same. If for any of the first three contract
years, the actual inventory turns achieved is greater than the Inventory Turns
Target, then Cardinal Health will pay Kmart an inventory reduction bonus of 10%
on such reduction in inventory within 5 business days of Kmart's invoice for
same. On or before the third anniversary of the Commencement Date, the Parties
will mutually implement a central inventory management program (the "Central
Inventory Management Program") pursuant to which Cardinal Health will assume
responsibility for managing the ordering process and the consigned pharmacy
inventories for the Stores. Once the Central Inventory Management Program has
been implemented the Inventory Turns Target will be discontinued, and no
further adjustments (other than a pro-rata adjustment through the date of such
implementation) will be made by or to either Kmart or Cardinal Health. If the
Central Inventory Management Program is not implemented by the third
anniversary of the Commencement Date, then the Inventory Turns Target in the
fourth and fifth contract years will be 12 (and the related service charge and
inventory reduction bonus calculations will continue as described above).
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All Non Rx Products will continue to be ordered and delivered as set
forth in Section 5(a), above, 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.
Section 6. PUERTO RICO. Notwithstanding anything contained in this
Agreement to the contrary, all Merchandise to be delivered to Stores located in
Puerto Rico will continue to be ordered and delivered as set forth in Section
5(a), above, and paid for as set forth in Section 8(a), below, both before and
after the Consignment Effective Date. The purchase price for all Merchandise
delivered to Stores located in Puerto Rico will be as described in Section 7
below consistent with the Pricing Matrix (as defined below). Cardinal Health
will deliver all Merchandise to Stores located in Puerto Rico FOB Cardinal
Health's distribution facility located in New Orleans, Louisiana (or such other
facility as may be designated by Cardinal Health). Title to such Merchandise
will pass to Kmart upon delivery to Kmart's designated freight forwarder.
Section 7. PURCHASE PRICE. The purchase price for Rx Products purchased
under this Agreement will be an amount equal to Cardinal's Cost less the
percentage of Cardinal's Cost shown in the pricing matrix described in the
Section 7 Disclosure Schedule (the "Pricing Matrix"), which amount is net of the
prompt payment discount provided in Section 8 of this Agreement. As used herein,
(a) prior to the Consignment Effective Date, the term "Cardinal's Cost" means
the manufacturer's published wholesale acquisition cost ("WAC") on the date the
Merchandise is ordered by the Stores, and (b) from and after the Consignment
Effective Date, the term "Cardinal's Cost" means the manufacturer's published
WAC on the date the Rx Products is dispensed by the Stores. Manufacturer
off-invoice quantity discounts and promotional allowances made available to
Cardinal Health will be included in the Kmart price. Distribution allowances due
a retailer and made available to Kmart for product placement in Kmart Stores
will be paid directly to Kmart by the applicable vendor or by Cardinal Health
should the vendor credit Cardinal Health for Kmart's distribution or placement
allowances.
The purchase price for Non Rx Products purchased under this Agreement
will be equal to Cardinal's Cost plus the percentage of Cardinal's Cost shown in
the Pricing Matrix. As used herein, the term Cardinal's Cost for Non Rx Products
means WAC on the date the Non Rx Products are ordered by the Stores.
The purchase price for selected Merchandise, including but not limited
to Repackaged Drug Products, multisource pharmaceuticals, private label
products, medical surgical supplies, home health care/durable medical equipment,
contract price items, certain antibiotics, Merchandise acquired from vendors not
offering customary cash discount or other terms reasonably acceptable to
Cardinal Health, and other slow moving, specialty, and Non Rx Products will not
be based upon the cost pricing described in the Pricing Matrix, but will instead
be net-billed in accordance with the terms, conditions and special programs
established by Cardinal Health (including applicable mark-up) for such
Merchandise. Merchandise described in this paragraph is sometimes referred to as
"Specially Priced Merchandise".
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Kmart will maintain a table of the purchase prices (the "Pricing
Table") for Rx Products determined in accordance with the provisions of this
Section 7 and the Section 7 Disclosure Schedule, which table will be updated and
supplemented from time to time to reflect actual increases or decreases in the
applicable purchase price. All changes to the Pricing Table will be initiated by
Cardinal Health, subject to review and verification by Kmart. Changes in the
purchase price for any Rx Product will not be effective in the Pricing Table
until the actual effective date of the change. Kmart will promptly input into
the Pricing Table all valid changes to the applicable purchase prices.
Section 8. PAYMENT TERMS.
(a) PRIOR TO CONSIGNMENT EFFECTIVE DATE. Prior to the
Consignment Effective Date, Cardinal Health will produce and transmit to Kmart
on a weekly basis a consolidated statement with line item detail on tape for all
Store purchases invoiced by Cardinal Health during the preceding seven days. For
purchases invoiced Friday through Thursday, Cardinal Health will issue its
statement on the next succeeding Friday and payment of such statement must be
received by Cardinal Health no later than noon (Dublin, Ohio time) on the second
Monday following such Friday (such second Monday, the "Non Consigned Merchandise
Prompt Payment Date") in good funds transferred via ACH electronic funds
transfer to such bank account as Cardinal Health may from time to time designate
in writing to Kmart or other payment method agreed to by the Parties. Should
such second Monday be a bank holiday, payment must be so received by noon
(Dublin, Ohio time) on the following Tuesday. (For example, for purchases
Friday, May 7 through Thursday, May 13, the statement would be issued Friday,
May 14, and payment must be received via ACH electronic funds transfer or other
payment method agreed to by the Parties no later than noon (Dublin, Ohio time)
on Monday, May 24. If Monday, May 24 is a bank holiday, the payment must be
received via ACH electronic funds transfer or other payment method agreed to by
the Parties no later than noon (Dublin, Ohio time) on Tuesday, May 25.)
(b) AFTER CONSIGNMENT EFFECTIVE DATE. From and after the
Consignment Effective Date, the Rx Products will be paid for by Kmart in good
and usable funds on the second 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 second banking day, the "Consigned
Merchandise Prompt Payment Date" and, together with the Non Consigned
Merchandise Prompt Payment Date, the "Prompt Payment Date"). In order to
facilitate proper accounting and record-keeping, the Parties will establish
procedures to document the product movement at the time of delivery.
Physical inventories will be conducted by Kmart at Kmart's expense,
with the participation of Cardinal Health and its representatives, as follows:
(i) as of October 31, 1996, with respect to each of the Sample Stores; (ii) as
of each July 31 during the term of the Agreement, with respect to all Stores;
and (iii) as of conversion to auto replenishment, with respect to each Store
implementing such conversion. Kmart will conduct cycle
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counts on a limited number of items between physical inventories to confirm the
integrity of the system, at such times and frequency as may be reasonably
approved by the Parties. If consigned product is damaged or lost by casualty or
shrinkage (due to theft or other unexplained loss), then Kmart will treat such
product as having been sold or dispensed and the Parties will include the amount
due to Cardinal Health for such product in calculating any net underpayment or
overpayment below.
Promptly following the end of each contract quarter, the Parties will
calculate a reconciliation of the ending consigned inventory. This
reconciliation will be determined as a function of beginning consigned
inventory, plus net consigned product delivered to the Stores during the
reconciliation period, less payments made by Kmart to Cardinal Health during the
reconciliation period, and subject to an inflation factor to reflect the
agreement of the Parties that Cardinal is entitled to all price inflation on the
consigned inventory. For purposes of this calculation, the inflation factor will
be calculated comparing the price at the beginning of the period against the
price at the end of the period and applying the difference against the
dispensing volume per item. This weighted average will be applied against the
computed balance of consigned inventory as of the end of the reconciliation
period. If a quarterly reconciliation reflects a shortage or overage in the
consigned inventory (as compared to the amount of consigned inventory delivered
by Cardinal Health but not yet paid for), then such amount will be calculated
and carried forward to the following contract quarter. As of the end of each
contract year, an aggregate reconciliation for the year will be calculated by
Cardinal Health and confirmed by Kmart (netting all quarterly shortages and
overages for such contract year), and any net overpayments or underpayments
determined to be owed based upon such reconciliation will be paid by/to the
applicable Party promptly following completion of such reconciliation.
All Non Rx Products will continue to be paid for as set forth in
Section 8(a) above both prior to and after the Consignment Effective Date.
(c) METHOD OF PAYMENT. All payments for Merchandise will be
made by Kmart via ACH electronic funds transfer or other method agreed to by the
Parties so as to provide Cardinal Health with good and usable funds on or before
the applicable due date as defined below. Kmart will receive a 2% prompt payment
cash discount on all payments received by Cardinal Health by the applicable
Prompt Payment Date. Cardinal Health retains the right to make appropriate
adjustments to the Pricing Matrix, refuse orders, and/or suspend its supply
relationship as to all or any part of the orders placed under this Agreement if
Kmart fails to make payments to Cardinal Health in accordance with the
provisions of this Agreement (other than for any invoice which is disputed in
good faith and in a reasonably timely fashion).
Section 9. REPACKAGED DRUG PRODUCTS. During the term of this Agreement,
Cardinal Health will make available to Kmart its full line of Repackaged Drug
Products, and Kmart will obtain from Cardinal Health pursuant to the consignment
provisions contained herein and in the Purchase and Consignment Agreement all
Repackaged Drug Products for the
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Stores. Kmart will participate in Cardinal Health's automatic substitution
program to facilitate maximum savings associated with the repackaging program.
The initial net price list (i.e., net of anticipated Repackaged Drug
Product volume discounts) to Kmart for consigned Repackaged Drug Products is
included in the Section 9 Disclosure Schedule, which schedule may be adjusted
from time to time by Cardinal Health with prior notice to Kmart based upon
additions and deletions of repackaged items and changes in Cardinal's Cost for
the Rx Products in proportion to such change in Cardinal's Cost (as adjusted
from time to time, the "Repackaged Drug Product Price List"). Cardinal Health
will pay volume discounts on Kmart's purchases of Repackaged Drug Product as
specified in the Section 9 Disclosure Schedule. In no event will Cardinal
Health's price (net of discounts) for Repackaged Drug Products to Kmart fail to
reflect a price less than Cardinal Health's standard ProfitPak(R) price.
Section 10. HEALTHTOUCH(R). Cardinal Health will provide to Kmart
without additional charge the use of fifty Healthtouch units for a six-month
test period commencing as of a date and in Stores mutually selected by the
Parties. During the test period, Kmart will not be responsible for any damage to
the Healthtouch units from any cause. The purpose of the test period is to
determine the revenue-generating potential from advertisements placed on the
Healthtouch units located in the Stores. During the test period, the Parties
will cooperate with each other to evaluate the advertising revenue and
incremental sales potential of the Healthtouch units located in the Stores. If
the Parties agree to extend the Healthtouch project following the test period
then, as part of such extended program (the "Extended Healthtouch Project"),
they will also develop a fee-sharing arrangement designed to provide Kmart with
35% of net profits (i.e., after equipment, in-Store maintenance, repair, monthly
service, and paper costs, and other charges) generated from the advertising
revenues associated with Healthtouch units placed in the Stores.
Upon termination of: (a) the test period, if no Expanded Healthtouch
Project is initiated; (b) the Expanded Healthtouch Project; or (c) this
Agreement for any reason, Kmart will, upon request, promptly make the
Healthtouch kiosks available to Cardinal Health for pickup. Kmart will not be
responsible for any Healthtouch kiosk not removed by Cardinal Health within 30
days of such termination.
Section 11. AUTO REPLENISHMENT SYSTEM AND DATA INTERCHANGE. Following
the Commencement Date, the Parties will cooperate in the development and
installation of an auto replenishment software system for all of the Stores,
which software system will satisfy all requirements necessary to timely
implement the Central Inventory Management Program in a manner reasonably
acceptable to the Parties. Such software system will be mutually selected by
Kmart and Cardinal Health. The costs associated with the development and
installation of such software system will be shared equally by Kmart and
Cardinal Health.
Both prior to and after installation of the automated replenishment
system, Kmart will provide, and Cardinal Health and Kmart will share equally in
all costs associated with,
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a mutually agreed upon electronic data communications connection to Cardinal
Health, to support and facilitate a timely exchange of the dispensing data
required to support this Agreement (not to include any patient specific data)
including but not limited to transmission of daily dispensing data on a daily
basis. Both parties will use all reasonable efforts to maintain the
availability, security, and privacy of this communications link and the data
exchanged. 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.
Section 12. CARDINALCHOICE-HQ(TM). Cardinal Health will provide at one
Kmart location, at no additional cost to Kmart, its CardinalCHOICE-HQ Corporate
System software.
Section 13. ADDITIONAL SERVICES. Cardinal Health will provide, at no
additional cost to Kmart, the following additional services to each Store:
(a) a Telxon order entry device for use by the Store for the
ordering of Merchandise from Cardinal Health (250 stores will
receive Telxon devices with special physical inventory
capabilities). Cardinal Health will be responsible for
maintenance of the Telxon devises resulting from normal use
and wear;
(b) a hard copy standardized chain-wide merchandise catalogue
to be delivered to each Kmart Store 60 days from the
Commencement Date and provided to all Kmart Stores on a
quarterly basis;
(c) product stickers with each item ordered, with color coding
within 90 days of the Commencement Date;
(d) controlled substance report listing all DEA scheduled
pharmaceuticals delivered during the reporting month;
(e) touch tone stock check;
(f) inventory listing sheets;
(g) one set of Mylar shelf labels with capability to sort in
store layout sequence listing the Rx Products by either
generic or brand name;
(h) telephone customer service Monday through Friday
(excluding holidays) at all Cardinal Health distribution
centers; and
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(i) customized reports upon request by Kmart headquarters as
agreed from time to time between Kmart and Cardinal Health.
Section 14. GENERIC ALLIANCE. Cardinal Health is currently establishing
an enhanced generic formulary and related automatic substitution program for
multisource pharmaceuticals (the "Generic Alliance") with a number of its
customers other than Kmart. The Generic Alliance will combine the expertise,
experience, and purchasing volume of the respective participants in order to
achieve improved pricing and discounts on generic drugs from pharmaceutical
suppliers. Kmart agrees to participate in the Generic Alliance (and the Parties
will share the savings arising from such program) in the manner outlined in the
Section 14 Disclosure Schedule. Cardinal Health reserves the right to determine
which third parties other than Kmart may participate in the Generic Alliance and
inclusion of Kmart in the Generic Alliance will not preclude any other customer
of Cardinal Health from participating in the Generic Alliance.
Section 15. JOINT MARKETING INITIATIVES. During the term of this
Agreement, the Parties will endeavor to develop other joint marketing
initiatives to improve the sales and profitability of the Kmart pharmacy
operations, including expansion of market share incentives with branded
manufacturers, DUR programs, patient micro marketing programs, autodistribution
and rapid stocking for new products, and prescription/OTC companion sales
programs. Specific terms of these programs, including applicable gain-sharing
allocations, will be set forth in separate program materials to be mutually
developed by the Parties.
To ensure mutual benefits of the Joint Marketing Initiatives, Kmart
agrees that, during the term of this Agreement, Kmart will not, directly or
indirectly, participate in any similar or competitive programs or initiatives,
either independently or with any third party (other than Cardinal Health),
except for those specific initiatives listed in the Section 15 Disclosure
Schedule with which Kmart is involved as of the Commencement Date.
Notwithstanding the foregoing, if Kmart should provide notice (the "Initiative
Notice") to Cardinal Health in writing of Kmart's proposed participation in any
joint marketing initiative (including a list of the third parties involved and
a summary of the terms and conditions of such initiative) prior to such time as
Cardinal Health has proposed a similar vendor specific competitive program or
initiative to Kmart, then Kmart may participate in such other program or
initiative with the vendor specified in the Initiative Notice on the terms and
conditions described in the Initiative Notice.
Section 16. REPLENISHMENT ERRORS/OUTDATES/RETURNS OF 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 Non Rx Products (including outdated
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Non Rx Product, which must be processed via a third party returned goods
company) 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 and manufacturer return goods policies in effect from time
to time during the term of this Agreement.
(b) RX PRODUCTS. Consigned Rx Products are owned by an
affiliate of Cardinal Health pursuant to this Agreement and the Purchase and
Consignment Agreement. In order to assure that the Rx Products located in the
Stores comply with applicable requirements concerning expiration dating, the
Parties have agreed to procedures pursuant to which consigned Rx Products may be
processed back through the Cardinal Health distribution centers. These
procedures (the "Pharmacy Procedures") will be separately agreed upon by the
Parties. It is understood and agreed that Kmart will be solely responsible (both
prior to and following implementation of the Central Inventory Management
Program) for all of the following ("Category 1 Products"): (a) any item which
has been used or opened, is partially complete, or is without all original
packaging, labeling, inserts, or operating manuals; (b) product that is
stickered, marked, damaged, or defaced; (c) any sterile or refrigerated
merchandise that was not properly stored and protected at all times; and (d) any
low stability products which are unusually sensitive to temperature and handling
conditions. Notwithstanding anything to the contrary contained elsewhere in this
Agreement, Cardinal Health will not be required to process Category 1 Products
back through its distribution centers, and Category 1 Products will instead be
treated as having been sold or dispensed by Kmart and will be paid for in
accordance with the procedures set forth in the last paragraph of this Section
16(b).
On a contract quarterly basis, Kmart Stores will inspect Rx Products on
site and remove those unopened packages which are not anticipated to be used
within 3 months (based on previous demand history) and have dating less than 9
months. If Cardinal Health is able to add such Rx Products to its warehouse
inventory for sale in the normal course of its business, it will do so. To
clarify the foregoing, "in the normal course of its business", the only
procedure Cardinal Health performs to add Rx Products back to its warehouse
inventory for sale is to transport such products from the loading dock of the
applicable Cardinal Health distribution center to the warehouse shelves of such
distribution center. It is understood and agreed by the Parties that if
stability testing or any other procedure would be required to permit such
product to be returned to Cardinal Health's warehouse inventory for sale
pursuant to the Prescription Drug Marketing Act of 1987 or other applicable
regulatory requirements, then Cardinal Health shall not be required to perform
these procedures and shall instead treat such product as Unmerchantable Products
under the procedures described below. For Rx Products which Cardinal Health is
unable to add to its warehouse inventory in the normal course of its business as
described above (the "Unmerchantable Products"), Cardinal Health will arrange
for a third party to process such Rx Products directly to the applicable
manufacturer, and Cardinal Health will retain all manufacturer credits
associated with such Rx Products, net of any third party fees (the "Manufacturer
Credits"). Kmart will pay to Cardinal Health a 5% handling fee for any Rx
Products processed back through the
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Cardinal Health distribution centers or to a third party processor (the
"Processing Amount") in the manner described below.
The aggregate purchase price for all Unmerchantable Products processed
back through the Cardinal Health distribution centers or to the designated third
party processor will be calculated as of the last day of each contract quarter
(the "Quarterly Stock Rotation Amount"), subject to verification by both
Parties. Kmart will pay Cardinal Health a fee associated with all Unmerchantable
Products (the "Stock Rotation Fee") in good and usable funds on or before the
10th business day immediately following completion of the quarterly
reconciliation process for each contract quarter as follows:
(A) for all Category 1 Products, both prior to and following implementation of
the Central Inventory Management Program, the Processing Amount plus the
difference (the "Difference") between (i) the sum of the Quarterly Stock
Rotation Amount and (ii) the aggregate amount of the Manufacturer Credits for
such Rx Products; and
(B) for all other Unmerchantable Products,
(i) for periods prior to implementation of the Central Inventory
Management Program, the Processing Amount plus (a) for the first
$150,000 of the Difference, one-half (1/2) of the Difference and (b)
the entire Difference above $150,000; and
(ii) for periods after implementation of the Central Inventory
Management Program, the Processing Amount plus one-half (1/2) of the
Difference.
Following termination of this Agreement, the Parties will continue to process
any Unmerchantable Products for which processing began prior to termination of
the Agreement and Kmart will remit to Cardinal Health any portion of the Stock
Rotation Fee attributable to such Unmerchantable Products which has not
previously been recovered by Cardinal Health during the term of this Agreement.
Section 17. RESPONSIBILITY FOR MERCHANDISE/REGULATORY COMPLIANCE.
Cardinal Health will deliver all Non Rx Products to the Stores FOB destination,
freight prepaid, and Cardinal Health will bear all risk of loss or damage to
such Non Rx Products while in transit. Upon and following delivery of
Merchandise to the Stores, and whether before or after the Consignment Effective
Date and notwithstanding consignment, Kmart will bear all risk of loss or damage
to all Merchandise, including without limitation loss or damage resulting from
theft or other diversion, fire or other casualty loss.
Cardinal Health will be responsible for and comply with all applicable
federal, state, DEA, and other laws and regulations associated with the
distribution of Merchandise, including without limitation special procedures for
controlled substances, dangerous drugs, and other prescription drugs
(collectively, "Rx Compliance") prior to delivery of Merchandise to the Stores.
Notwithstanding consignment, Kmart will be responsible for and comply with all
Rx Compliance at all times from and after delivery of
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Merchandise to the Stores, including without limitation all Rx Compliance
associated with the storage and handling of consigned Rx Products at the Stores
and the dispensing of Rx Products to its customers.
Section 18. INDEMNIFICATION. Each Party will indemnify, defend, and
hold the other harmless against and from those claims, liabilities, or expenses
(including reasonable attorneys fees) directly attributable to the breach by
that Party of its obligations under this Agreement. Notwithstanding the
foregoing, neither Party will be liable to the other for any incidental,
consequential, punitive or exemplary damages arising in connection with this
Agreement, even if each has been advised of the possibility of such damages and
without regard to the nature of the claim or the underlying theory or cause of
action (whether in contract, tort, or otherwise).
Section 19. MANUFACTURER STANDARDS. Cardinal Health will stock all Rx
Products requested by Kmart for which at least 3 shipping units per month per
Cardinal Health distribution facility are purchased by all Cardinal Health
customers serviced by each distribution center. Notwithstanding the foregoing,
Cardinal Health reserves the right at all times to determine what Merchandise it
will stock in its distribution facilities based upon product quality,
manufacturer indemnity policies, Kmart's past and future merchandise
requirements, and other standards reasonably determined by it, and Cardinal
Health may delete from its available inventory Merchandise which fails to comply
with these standards. Cardinal Health will exercise all reasonable efforts to
provide prior notice to the Stores prior to deleting items previously purchased
by those Stores.
Section 20. TERM. The term of this Agreement will commence as of August
1, 1996 (the "Commencement Date") and will continue thereafter until the fifth
anniversary of such date, with the option to extend the term for successive
additional periods of one year each upon the mutual written consent of the
Parties. Promptly following the termination of this Agreement, Kmart will (a)
return to Cardinal Health all order entry devices, and other hardware or
equipment provided by Cardinal Health and not purchased and paid for by Kmart
and (b) make the Healthtouch kiosks available to Cardinal Health for pickup.
Either Party may effect an early termination of this Agreement for cause: (a) 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 60 days of receipt of such notice; or (b) by notifying the other
Party of its election to immediately terminate the Agreement following the other
Party's involvement as the debtor in any federal or state bankruptcy or
insolvency proceeding.
Notwithstanding the above, either Party reserves the right, at any time
from and after the second anniversary of the Commencement Date, to effect an
early termination of this Agreement without cause. In order to effect such an
early termination, a Party shall be required to give written notice to the other
not less than 180 days prior to the effective date of the early termination
(which notice may not be initiated by either Party prior to the second
anniversary of the Commencement Date). Notwithstanding the foregoing, an early
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termination by either Party shall not be effective unless the Early Termination
Fee as described in the Section 20 Disclosure Schedule is paid on or before the
effective date of the termination. In the event either Party shall elect to
terminate this Agreement without cause as set forth herein, the other Party will
not be entitled to recover any damages or penalty other than the fees expressly
provided herein.
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, the payment for all Merchandise previously
purchased by Kmart and the payment for, or the 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.
Section 21. TAXES/REPORTING OBLIGATIONS. Kmart will be responsible for
any sales, use, excise, gross receipts, or other federal, state, or local taxes
or other assessments (other than any tax based solely on the net income of
Cardinal Health or the value of the consigned inventory) and related interest
and penalties in connection with or arising out of the transactions contemplated
by this Agreement. Cardinal Health will be responsible for any personal property
or inventory tax on its consigned inventory located at the Stores, and Kmart
will be responsible for any personal property or inventory tax on non-consigned
inventory located at the Stores. If either Party pays any such amounts which the
other Party is obligated to pay under this section, then prompt reimbursement in
an amount equal to the amount so paid is required.
If and to the extent any discounts, credits, rebates, or other purchase
incentives are paid or applied by Cardinal Health with respect to Merchandise
purchased under this Agreement, then applicable provisions of the
Medicare/Medicaid and state health care fraud and abuse/anti-kickback laws
(collectively, "fraud and abuse laws") may require disclosure of the applicable
price reduction on Kmart's claims or cost reports for reimbursement from
governmental or other third parties. Kmart agrees to comply with all applicable
provisions of the fraud and abuse laws.
Section 22. RECORDS AND AUDIT. Each Party will maintain records
pertaining to its performance under this Agreement and as required by applicable
FDA requirements. Not more than twice in any twelve-month period during the term
of this Agreement, any renewal term and for a period of one year following
termination, and following 30 days advance written notice to the other Party,
each Party will have the right to appoint one or more of its employees and/or
its designated independent certified public accountants to review and audit
relevant records for the purpose of verifying compliance with the terms of this
Agreement. Any such review/audit will be subject to a confidentiality agreement
signed by the Party conducting the review/audit and its employee(s) and
designated certified public accountants who will have access to the information
prior to beginning the
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review/audit. Any material error(s) discovered by such audit will be submitted
to the Party being audited for verification and, if and when determined to
constitute a material error, the Party being audited will correct such error
within 10 days and also reimburse the Party conducting the review/audit for the
reasonable out-of-pocket costs of the audit.
Section 23. KMART ACQUISITION OF PHARMACIES. The Parties acknowledge
that during the term of this Agreement Kmart may purchase independent retail
pharmacies (each an "Acquired Pharmacy") and integrate the Acquired Pharmacies
into the Kmart Stores. Cardinal Health will (subject to receipt of documentation
from Kmart evidencing unencumbered title, in form and content comparable to the
Purchase and Consignment Agreement and reasonably acceptable to Cardinal Health)
purchase the Rx Products owned by each Acquired Pharmacy promptly following the
time of any such acquisition, which Rx Products will become part of the
Consigned Inventory and subject to the Purchase and Consignment Agreement. The
purchase price for the Rx Products purchased from any Acquired Pharmacy will be
an amount equal to Cardinal's Cost less the percentage of Cardinal's Cost
specified in the Pricing Matrix (or such other cost applicable to any Specially
Priced Merchandise). For purposes of this Section 23, Cardinal's Cost means the
manufacturer's published WAC on the date of Cardinal Health's purchase of the Rx
Products located at the Acquired Pharmacy. All Rx Products purchased from any
Acquired Pharmacy will be dispensed at Kmart Stores; no such Rx Products may be
returned to Cardinal Health. Kmart will give Cardinal Health written notice as
far in advance as reasonably practicable in the event that Kmart proposes to
acquire any Chain Pharmacy (defined below) or any independent pharmacies in
excess of a total of 60 per year. In the event Kmart's intends to acquire in
excess of 60 pharmacies per year, Cardinal Health may, as to any or all of the
inventory held by such pharmacy in excess of 60: (a) decline to purchase such
inventory; (b) modify the consignment terms with respect to such inventory; or
(c) purchase such inventory as described above. For purposes of this Agreement,
"Chain Pharmacy" means any 10 or more pharmacies having common ownership.
Section 24. FORCE MAJEURE. Each Party's obligations under this
Agreement (exclusive of payment obligations) will be excused if and to the
extent that any delay or failure to perform such obligations is due to fire or
other casualty, product or material shortages, strikes or labor disputes,
transportation delays, manufacturer out-of-stock or delivery disruptions, acts
of God, seasonal supply disruptions, or other causes beyond the reasonable
control of that Party, but only during the duration of such condition.
Section 25. RELATIONSHIP OF THE PARTIES. The relationship among the
Parties is and shall be that of independent contractors. This Agreement does not
establish or create a partnership or joint venture among the Parties.
Section 26. NOTICES. Any notice or other communication required or
desired to be given to any Party under this Agreement shall be in writing and
shall be deemed given when (a) deposited in the United States mail, first-class
postage prepaid, and addressed to that Party at the address for such Party set
forth below; (b) the next business day
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immediately following delivery to Federal Express, Airborne, or any other
similar express delivery service for next-day delivery to that Party at that
address; or (c) sent by facsimile transmission, with electronic confirmation, to
that Party at its facsimile number set forth below. Any Party may change its
address or facsimile number for notices under this Agreement by giving the other
Party notice of such change.
Notices to Kmart shall be addressed to the following:
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
Attention: General Counsel
Facsimile Number: 810-643-1054
Notice to Cardinal Health shall be addressed to the following:
Cardinal Health
5555 Glendon Court
Dublin, Ohio 43016
Attention: General Counsel
Facsimile Number: 614-717-8919
Section 27. ENTIRE AGREEMENT. This Agreement, the Disclosure Schedules
hereto, the Purchase and Consignment Agreement, the Schedules and Exhibits
thereto, and the other agreements and schedules referenced in the foregoing
documents constitute the entire agreement and understanding of the Parties with
respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements, proposals, and understanding between the Parties
relative to the subject matter hereof, including without limitation the Current
Agreement.
Section 28. AMENDMENTS. No changes to this Agreement will be made or be
binding on any Party unless made in writing and signed by each Party to this
Agreement.
Section 29. WAIVER. Neither Party's failure to enforce any provision of
this Agreement will be considered a waiver of any future right to enforce such
provision.
Section 30. SEVERABILITY. The intention of the Parties is to comply
fully with all laws and public policies, and this Agreement shall be construed
consistently with all laws and public policies to the extent possible. If and to
the extent that any court of competent jurisdiction determines that it is
impossible to construe any provision of this Agreement consistently with any law
or public policy and consequently holds that provision to be invalid, such
holding shall in no way affect the validity of the other provisions of this
Agreement, which shall remain in full force and effect.
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Section 31. SUCCESSORS. Neither Party shall have the right to assign
this Agreement or any of such Party's rights or obligations under this Agreement
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Cardinal Health may assign
and reassign its rights and responsibilities under this Agreement among various
subsidiaries of Cardinal Health, Inc. Subject to the preceding sentences, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
and against the respective successors and assigns of the Parties.
Section 32. CONFIDENTIAL TREATMENT OF TERMS. The terms of the various
advertising, inventory management, repackaging, joint marketing initiatives, and
other programs referred to in this Agreement have been specially designed by
Cardinal Health for its supply relationship with Kmart, and may not be publicly
disclosed by Kmart or directly or indirectly communicated with any third party
without the prior written consent of Cardinal Health.
Section 33. SOFTWARE PROTECTION. The CardinalCHOICE-HQ and Healthtouch
software (collectively, "Cardinal Health Software") being provided to Kmart in
connection with this Agreement are and will at all times remain the sole
property of Cardinal Health, and are subject to the terms and conditions of the
standard user license agreements for such software (copies of which user license
agreements have been previously provided to Kmart). Upon termination of this
Agreement for any reason, Kmart's license to use the Cardinal Health Software
will automatically expire and Kmart will promptly return to Cardinal Health the
original and any copies of the Cardinal Health Software.
Section 34. MANAGED CARE INITIATIVES. The Parties will jointly develop
initiatives designed to improve Kmart's access to third party plans, including
the development of improved marketing strategies and capabilities material, the
development of an expanded provider network, utilization of Cardinal Health's
affiliated PBM system, future managed care agreements, etc. Specific terms of
these initiatives, including performance-based revenue sharing arrangements,
will be set forth in separate program materials to be mutually developed by the
Parties.
Section 35. REPRESENTATIONS AND WARRANTIES.
(a) Cardinal Health hereby represents and warrants that
(i) each of its affiliated subsidiaries listed on the signature page hereto is
a corporation duly incorporated, validly existing and in good standing under
the laws of the state listed as the state of incorporation for that subsidiary
on the signature page hereto, (ii) each of its affiliated companies listed on
the signature page hereto has the full right, power and legal authority to
enter into and perform their respective obligations under this Agreement, (iii)
the officer executing this Agreement on behalf of the affiliates listed on the
signature page hereto has full corporate power and authority to execute this
Agreement on behalf of each of those companies, and (iv) assuming the due
authorization, execution and delivery of this
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Agreement by Kmart, this Agreement constitutes the legal, valid and binding
agreement of each of its affiliated companies listed on the signature page
hereto, enforceable against such affiliated companies in accordance with its
terms, except as enforceability may be limited by (x) applicable bankruptcy,
insolvency and other similar laws affecting the rights of creditors generally
and (y) general principles of equity.
(b) Kmart hereby represents and warrants that (i) Kmart Corporation is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of Michigan, (ii) it has the full right, power and legal
authority to enter into and perform its obligations under this Agreement, (ii)
the officer executing this Agreement on behalf of Kmart has full corporate power
and authority to execute this Agreement on behalf of Kmart, and (iv) assuming
the due authorization, execution and delivery of this Agreement by Cardinal
Health, this Agreement constitutes the legal, valid and binding agreement of
Kmart, enforceable against Kmart in accordance with its terms, except as
enforceability may be limited by (x) applicable bankruptcy, insolvency and other
similar laws affecting the rights of creditors generally and (y) general
principles of equity.
Kmart Cardinal Health*
By:__________________________ By:_________________________
Print Name:___________________ Print Name:__________________
Title:_________________________ Title:________________________
*The term "Cardinal Health" shall include the following affiliated companies:
RedKey, Inc., an Ohio corporation (Dublin, Ohio); Cardinal Syracuse, Inc., a New
York corporation (Syracuse, New York); Marmac Distributors, Inc., a Connecticut
corporation (Hartford, Connecticut); James W. Daly, Inc., a Massachusetts
corporation (Peabody, Massachusetts); Ohio Valley-Clarksburg, Inc., a Delaware
corporation (Wheeling, West Virginia); Chapman Drug Company, a Tennessee
corporation (Knoxville, Tennessee); Cardinal Florida, Inc., a Florida
corporation (Lakeland, Florida); Cardinal Mississippi, Inc. a Mississippi
corporation (Richland, Mississippi); Solomons Company, a Georgia corporation
(Savannah, Georgia); Whitmire Distribution Corporation, a Delaware corporation
(Folsom, California); Humiston-Keeling, Inc., an Illinois corporation (Calumet
City, Illinois); Behrens 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 ("CHI"), as may be designated by CHI.
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